DailyPlay – Opening Trade (RCL) – May 12, 2022

Special Notice

This is a conditional trade idea and the trade should not be taken immediately. Please read the Investment Rationale for more information on this trade. Also, keep in mind that the Credit received, the Max Risk, the Max Reward, as well as the OptionsPlay Score, will be different than what you see in this email, as we are waiting for the price to move more favorably before we enter the trade.

View RCL Trade

Strategy Details

Strategy: Short Call Vertical Spread

Direction: Bearish

Details: Sell 5 Contracts June 24 $65/$70 Call Vertical @ $1.32 Credit.

Total Risk: This trade has a max risk of $1,840 (5 contracts x $368 per contract). As this is a conditional order, the number of Contracts could change depending on the Total Risk at the time of opening the trade. We will base the numbers of Contracts on roughly $2,000 of Risk.

Trend Continuation Signal: This is a Bearish strategy on an ETF that is experiencing bearish 1M and 6M trends.

1M/6M Trends: Bearish/Bearish

Technical Score: 3/10

OptionsPlay Score: 99

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that if there is a multi-leg option strategy, it should be entered as a single trade. 

Learn how to size this trade for your portfolio size

Investment Rationale

With the market unable to hold gains and again getting slammed yesterday, more support levels have been taken out as sellers continue to overwhelm any short-term buying that comes in. SPYs gave up another 6+ points yesterday, breaking the $396 level (which was a place I had just bought back a small amount of the SPYs I had sold out of earlier this year). We may very well get down to the SPX 3617 target that I went out with a few weeks back, and possibly even sooner than I expected.

In general, because I tend to be a seller at extremely high prices in bull moves and at extremely low prices in bearish moves, it behooves me to simply sell names now that have already been crushed. Sure, they could still go lower, but more importantly, it makes it much harder to control risk when you play the direction of the trend when the stock is already well into that trend. So for me to do so, I need to see a pretty clear reason that there’s likely a good amount to go in that trend AND I can control my risk in a logical way.

This leads me to the chart of Royal Caribbean Group (RCL), which last week reported earnings that the Street did not like. In its large decline from the upper-$70s to the current $60 in the pasts two weeks, the one thing that stands out to me is that the weekly cloud’s Lagging Line has broken beneath the bottom of its cloud for the first time on the whole bullish move that’s been in place since the Covid 2020 low.

There is someone (or a group) of large players buying near this $60 level, based upon the Volume Profile distribution of prices (shown on the right side of the chart). Perhaps, it’s because ~$60 closes the gap from Q4 ’20. And if their buying creates a bounce, I wouldn’t mind selling a rally into the mid-$60s where very little volume has traded, allowing us to then sell a June 24th $65/$70 call spread. On Wednesday, that spread went out at $1.32 mid, but this will be different when/if the $65 becomes the ATM. (This is a conditional order, meaning that we aren’t going to put this on until/if we see a rally to the mid-$60s.)

Now that earnings are out of the way, and there is little significant catalyst for this to move much higher, the heaviness of this two-week move along with the cloud break makes me want to keep a bearish stance until this may very well mark a weekly Setup -9 some six weeks from now.