DailyPlay – Partial Closing Trade (AAPL) – May 22, 2023

Partial Closing Trade

• AAPL – 82.53% Loss: Sell to Close 2 Contracts (or 50% of your Contracts) June 16th $165 Puts @ $0.94 Credit. DailyPlay Portfolio: By Closing 2 of the 4 Contracts, we will receive $188.

Investment Rationale

Stocks rallied on Friday to their best levels of the year, as mega cap tech names continued their large outperformance. (On the week, the XLK was up 4.19% vs. the SPX being up 1.65% (and the latter figure includes tech’s performance within it.) The sentiment figure on the NDX is at 74% bulls, while it’s only 46% bullish for the SPX. With the QQQ on a weekly Setup +9 count and the SPX only on a Setup +1 count, one could say that the tech move could easily peter out in relative terms.

Last week’s rally pushed the SPX definitively above the 4155 weekly cloud top, neutralizing the negative bias that’s been in place since last May. In order of bullish cloud structure, the four major US stock indexes are ranked as: 1) Dow Industrials; 2) SPX; 3) NDX; and 4) Russell 2000 (despite 2023’s returns showing an order of NDX, SPX, Dow, and R2K).

Position-wise, based on what I wrote last week, you should now be out of the long SPY put spreads, and let’s also take down the long AAPL puts from 4 to 2 contracts.

Let’s look at a good example of what option traders are facing these days. After looking through a bunch of potential breakout candidates, I see that Accenture (ACN) is a good candidate to buy based upon its chart showing a trend line breakout, and a move up into the weekly cloud after 5 weeks in a row that the weekly high was at/near its cloud bottom. To me, this is a stock that looks headed higher, and very possibly to test the $312 level (where we see the bullish Propulsion Momentum level.) So, bingo, I think to myself that I have today’s Daily Play idea.

ACN – Weekly

But, buying a June 16th $290/$310 call spread costs $6.48 – some 32% of the strike differential. That’s more than we like to spend, as we try to be in the 25% to max 30% range if we can be.

So, what if we were to sell the $290/$275 put spread? Well, that collects $4.10, only 27% of the strike differential, and well beneath the 40% we look to collect on a credit spread.

That means that despite my bullish outlook on the stock, there’s no way to capture that potential upmove at a fair price in the options market.

This is the same thing I have seen for the past two months or so: the options market is no longer priced such that you can take on a new bullish position at a fair price. You essentially need to “overpay” to get the bull exposure you want, which means that the upmove needs to come virtually immediately to be able to offset the upped price you are paying for the right to get long the underlying stock in the future.

There are times in my long career that this has been the situation – that the best way to get long exposure is to actually buy the stock (and not use its options). Surely, you give up the leverage you get with options, and you also have to have the money to buy shares of stock (and in the case of something like ACN, you can only buy a small amount for your 2% of portfolio value). But frankly, the market-makers are basically now saying to you, “Pay our price to get bullish option exposure or go play something else”.