Highlight Trade of the Week:
Two of the three largest companies -$MSFT $AMZN- have been consolidating for a month in bullish continuation pennants . Both companies have a strong fundamental narrative over the next 5+ years, this is fairly indisputable. Seems like it would be the easiest call to make to say that $AMZN & $MSFT should breakout here & continue to the upside. Right?
Well, yes. Sometimes the market just is this simple. It may not sound "nice" & it's certainly naive to claim that the markets are simple (the markets are NOT simple, but sometimes they are) however, as a trader I have to call it as I see it; if there's a strong fundamental narrative, a bullish trend , bullish consolidation patterns, and strong trend line support, then a spade is a spade is a spade.
So if a spade is still a spade, let's dig! (Or play cards?)
The Trade
What can I say here that people don't know?! Go long! Buy stock, sell puts, buy calls - right!? It's pretty simple to say 'just buy calls!' And sure, this would work but perhaps we want a more specific options strategy.
Synth long is my first gut reaction to charts like this, and the beauty of a synthetic long is you can use the put leg to pay for the call leg, in other words a net credit synth long. An example of this would be to sell-to-open $AMZN 9/18 $3250 puts for ~$110 or just over 3% premium and buy-to-open the same expiration $3400 call for ~$83. Net credit is ~$27 which gives us a breakeven of $3227. The analog here to $MSFT would be to just do a synthetic long straddle ATM on $MSFT: 9/18 $215 long call for $5.80, 9/18 $215 short put for $7.60 - net credit is $1.80 & breakeven is stock above $213.20 on 9/18.
The thing about this trade is that the put premium on these two equities is rather poor when compared to smaller, higher beta stocks ($SHLL has been a favorite). Whereas on $AMD the synthetic calendar long made sense, here it may not make sense due to low IV. Additionally, $AMZN puts will tie up a large amount of capital - that is, if investors even have the capital to sell puts on this incredibly expensive stock. Here's some alternatives
Buy ITM November calls at a 65delta or higher for stock replacement & give yourself the ability to sell calls against your long calls easily. I happen to love this strategy. On $MSFT you will pay nearly $23 or just over 10% premium for the November calls, $8 extrinsic value or 35% of contract value for a breakeven above $223. The analog for $AMZN would be 65delta November $3100 calls for $377 or just over 10% premium, and nearly $200 extrinsic value or just 50% of contract value. ($MSFT is clearly the better value here). I happen to love 65delta or higher for contracts 1-3 months out in order to capture a move with less theta risk.
Yet another alternative would be to buy the January or February ATM/OTM calls. The difference between ATM or OTM here is really if you want to turn it into a spread and when you want to do that. We are expecting a move higher out of this pennant fairly soon - I would personally lean towards the OTM calls. $AMZN $3300/$MSFT $220 are nice near-the-money calls while $AMZN $3500/$MSFT $240 are nice OTM calls. You will pay around 10% for the near-the-money calls for a 5 month time frame. Play around with your delta as you give yourself more theta - the more theta you have the further OTM you could potentially buy if we indeed catch this move higher.
Finally, I will argue for LEAPS. The benefit of LEAPS here is you can do anything with a 50delta or less (ATM or OTM again depending on if you wanted to consistently sell near term calls as a calendar spread to generate a little extra income) AND that you do not pay short term tax - the latter may be the make or break behind your decision. $MSFT Jan 2022 $220 calls are priced at $30,~15% premium on current stock price or breakeven above $250 by Jan 2022; $MSFT Jan 2022 $260 calls at a ~35delta trade at nearly $17 for breakeven above $277 by Jan 2022 - slightly more risk for slightly more reward. The analog for $AMZN here is near-the-money $3300 calls for nearly $600 or nearly 20% premium on today's price for breakeven of $3900; or OTM $3500 calls for just over $500 or a breakeven of $4000 by Jan 2022.
TLDR; choosing options is based upon your strategy (long term vs short term, ITM vs ATM vs OTM), risk tolerance, and how it is you're allocating capital based on the prior. Naturally you will risk less on OTM & near term calls; therefore, finding the sweet spot between risk & reward is essential to choosing your strike & expiry. I see $MSFT $AMZN here as high probability moves to the upside & want to take that risk.
Disclosure: I am in both these positions, $MSFT Jan 2021 $220/$240 calls & $AMZN Jan 2021 $3300/$3500 calls, both long.
Two of the three largest companies -$MSFT $AMZN- have been consolidating for a month in bullish continuation pennants . Both companies have a strong fundamental narrative over the next 5+ years, this is fairly indisputable. Seems like it would be the easiest call to make to say that $AMZN & $MSFT should breakout here & continue to the upside. Right?
Well, yes. Sometimes the market just is this simple. It may not sound "nice" & it's certainly naive to claim that the markets are simple (the markets are NOT simple, but sometimes they are) however, as a trader I have to call it as I see it; if there's a strong fundamental narrative, a bullish trend , bullish consolidation patterns, and strong trend line support, then a spade is a spade is a spade.
So if a spade is still a spade, let's dig! (Or play cards?)
The Trade
What can I say here that people don't know?! Go long! Buy stock, sell puts, buy calls - right!? It's pretty simple to say 'just buy calls!' And sure, this would work but perhaps we want a more specific options strategy.
Synth long is my first gut reaction to charts like this, and the beauty of a synthetic long is you can use the put leg to pay for the call leg, in other words a net credit synth long. An example of this would be to sell-to-open $AMZN 9/18 $3250 puts for ~$110 or just over 3% premium and buy-to-open the same expiration $3400 call for ~$83. Net credit is ~$27 which gives us a breakeven of $3227. The analog here to $MSFT would be to just do a synthetic long straddle ATM on $MSFT: 9/18 $215 long call for $5.80, 9/18 $215 short put for $7.60 - net credit is $1.80 & breakeven is stock above $213.20 on 9/18.
The thing about this trade is that the put premium on these two equities is rather poor when compared to smaller, higher beta stocks ($SHLL has been a favorite). Whereas on $AMD the synthetic calendar long made sense, here it may not make sense due to low IV. Additionally, $AMZN puts will tie up a large amount of capital - that is, if investors even have the capital to sell puts on this incredibly expensive stock. Here's some alternatives
Buy ITM November calls at a 65delta or higher for stock replacement & give yourself the ability to sell calls against your long calls easily. I happen to love this strategy. On $MSFT you will pay nearly $23 or just over 10% premium for the November calls, $8 extrinsic value or 35% of contract value for a breakeven above $223. The analog for $AMZN would be 65delta November $3100 calls for $377 or just over 10% premium, and nearly $200 extrinsic value or just 50% of contract value. ($MSFT is clearly the better value here). I happen to love 65delta or higher for contracts 1-3 months out in order to capture a move with less theta risk.
Yet another alternative would be to buy the January or February ATM/OTM calls. The difference between ATM or OTM here is really if you want to turn it into a spread and when you want to do that. We are expecting a move higher out of this pennant fairly soon - I would personally lean towards the OTM calls. $AMZN $3300/$MSFT $220 are nice near-the-money calls while $AMZN $3500/$MSFT $240 are nice OTM calls. You will pay around 10% for the near-the-money calls for a 5 month time frame. Play around with your delta as you give yourself more theta - the more theta you have the further OTM you could potentially buy if we indeed catch this move higher.
Finally, I will argue for LEAPS. The benefit of LEAPS here is you can do anything with a 50delta or less (ATM or OTM again depending on if you wanted to consistently sell near term calls as a calendar spread to generate a little extra income) AND that you do not pay short term tax - the latter may be the make or break behind your decision. $MSFT Jan 2022 $220 calls are priced at $30,~15% premium on current stock price or breakeven above $250 by Jan 2022; $MSFT Jan 2022 $260 calls at a ~35delta trade at nearly $17 for breakeven above $277 by Jan 2022 - slightly more risk for slightly more reward. The analog for $AMZN here is near-the-money $3300 calls for nearly $600 or nearly 20% premium on today's price for breakeven of $3900; or OTM $3500 calls for just over $500 or a breakeven of $4000 by Jan 2022.
TLDR; choosing options is based upon your strategy (long term vs short term, ITM vs ATM vs OTM), risk tolerance, and how it is you're allocating capital based on the prior. Naturally you will risk less on OTM & near term calls; therefore, finding the sweet spot between risk & reward is essential to choosing your strike & expiry. I see $MSFT $AMZN here as high probability moves to the upside & want to take that risk.
Disclosure: I am in both these positions, $MSFT Jan 2021 $220/$240 calls & $AMZN Jan 2021 $3300/$3500 calls, both long.
Comment:
$AMZN Closed almost exactly at $3400 & $MSFT $229. I still see more upside for these trades despite the alarming degree of exuberance occurring.
AMZN (Pennant)
MSFT (Bull Flag)
AMZN (Pennant)
MSFT (Bull Flag)
$AMZN Daily with Squeeze