Investment Rationale

After several down days, stocks got a lift on Wednesday. The SPX is still down over 100 points this week, and would need quite a lift today to get it back into the black. I’d still be leaning toward a move down to near 3814 in the next several sessions, but I can’t tell if that would happen before or after the Fed’s rate change next Wednesday.

Today is Friday, so it’s weekly option expiration, along with the following economic releases for investors to wrangle with:

I have further trimmed some of my own holdings this week, as well as look to sell some losers to offset winners I’ve taken off the table this year, with the goal of reducing taxable gains. Consider doing the same, most especially if you’ve already taken gains on winners.

Most PMs won’t be doing much till next Tuesday’s and Wednesday’s big CPI and FOMC statements. I suggest you think similarly.

Closing Trades

• USO – 94.82% Loss: Buy to Close 2 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $1.63 Debit. DailyPlay Portfolio: By Closing the remaining 2 Contracts, we will be paying $168. We took partial profit on this trade on December 5 when we Closed 4 Contracts @ $0.35 Debit, and then again on December 6 when we closed 6 Contracts @ 0.58 Debit, and then on December 7 when we closed 4 Contracts @ $1.15 Debit Our average gain on this trade is –5.04% and our average cost basis to exit this trade is $0.80 Debit. 
• ZTS – 1.05% Gain: Sell to Close 4 Contracts Dec. 16th $150/$160 Call Vertical Spreads @ $2.90 Credit. DailyPlay Portfolio: By Closing the remaining 4 of 6 Contracts, we will be receiving $1,160. We took partial profit on this trade on December 5 when we Closed 2 Contracts @ $6.32 Credit. Our average gain on this trade is 40.77% and our average cost basis to exit this trade is $4.04 Credit. 

GE Bearish Opening Trade

View GE Trade

Strategy Details

Strategy: Short Call Vertical Spread

Direction: Bearish

Details: Sell to Open 6 Contracts Jan. 6th $85/$90 Call Vertical Spreads @ $2.04 Credit.

Total Risk: This trade has a max risk of $1,776 (6 Contracts x $296).

Counter Trend Signal: This is a Bearish trade on a stock that is experiencing a neutral to bullish trend.

1M/6M Trends: Neutral /Bullish

Technical Score: 9/10

OptionsPlay Score: 104

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. 

Please note that these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

Investment Rationale

Stocks had a quiet session on Wednesday, as most PMs are waiting till next week’s CPI and Fed news to make their next key decisions. Before I get to a new idea for today, let’s make sure you get out of the last two USO Dec. 9th put spreads we have on that expire tomorrow. What was a good bottom-fishing trade quickly turned around this week to turn into a loser, as oil has fallen to new 2022 lows.

We also have a long ZTS $150/$160 call spread that has done a turnaround after having initially worked. We’re back to breakeven on it (luckily, we had already reduced some of the position with a profit), so let’s just get out of the rest today. Roundtrips back to where we first got into a call spread is usually not something that I want to hold.)

For a new trade, I have one that not only looks like it offers a 2:1 reward-to-risk ratio going out one month from now, but surprisingly, it also lets us short the ATM call spread I want to while collecting 41% of the strike differential to the hedge strike above it that I’ll use (based on yesterday’s closing mid prices).

Earlier this year, we had a very successful short play in GE, when prices were much higher. As I have not looked at the name in months, I still had the chart open on one of my hundreds of chart pages. When I came across it today, I saw that the rally off the bottom has stalled right against its prior resistance area (i.e., the dashed horizontal, purple-colored line). I then saw that its weekly cloud bottom starts to dramatically tail off starting next week, and falls to the $75 area about a month from now.  Its cloud top – this week at $93.45 – falls over the next four weeks to flatten out to $88, virtually the same level it has so far stopped at on this rally.

GE – Weekly

The way I am looking at this is that going one month out, the likelihood that this can fall to next major support is twice the price decline than what would be lost if it got a breakout above $90. Therefore, this all lines up well to short a GE Jan. 6th $85/$90 call spread today, collecting my desired 40% strike differential credit – and being able to do so even in an environment that I’d really prefer to be buying options (because of cheap volatility cost relative to where it’s been this year). 

Partial Closing Trade

• USO – 25.64% Gain: Buy to Close 6 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $0.58 Debit. DailyPlay Portfolio: By Closing 6 of 12 Contracts, we will be paying $348.

UNG Conditional Bullish Opening Trade

View UNG Trade

Strategy Details

Strategy: Long Call Vertical Spread

Direction: Bullish

Details: Buy to Open 20 Contracts Jan. 13h $16.50/$18 Call Vertical Spreads @ $0.52 Debit.

Total Risk: This trade has a max risk of $1,040 (20 Contracts x $52).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a bearish trend.

1M/6M Trends: Bearish/Bearish

Technical Score: 1/10

OptionsPlay Score: 126

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. 

Please note that this is a CONDITIONAL trade. We will only enter the trade when the condition is met, which is IF UNG gets to the $16.50 – $16.25 zone. Also note that the cost basis, premium paid, as well as the number of contracts when we open this trade will therefore be different from what we post today. This condition is only valid for a week unless advised otherwise.

Investment Rationale

Stocks got hit hard yesterday while rates and the dollar moved higher.  A surprise? Nope. The major downtrend is still in effect on the SPX, and along with the recent active Aggressive Sequential +13 signal has still shown itself to be a place that the risk of a decline was higher than the chance of a further upmove. That, at least, is what has proven to be the right way to play in all of 2022, and as I recently wrote you, “You play what’s been working until it doesn’t”.

As I mentioned in Monday morning’s webinar, the SPX is now stuck between its major downtrend line and minor uptrend line – the former being more important than the latter (based upon time in effect and times the lines have been touched). 

SPY – Daily

If the week closes beneath 3906 (the mid-November low), I think we have seen the labeled gap get filled along with the bearish Propulsion Momentum level (3814) getting tested, which to me will be very important for bulls to defend. If they can’t, then I think that 2022 lows will get tested and likely be exceeded in the first quarter of ’23.

As per open positions, let’s take off another 6 USO Dec. 9th $67/$65 short put spreads today. (We took the first 4 off yesterday.) They expire on Friday, and we are taking pieces off each day this week thru Thursday.

We are also long a 50% position in a TSLA Dec. 30th $195/$225 call spread, and then yesterday got filled on the second half of the trade by buying a Dec. 30th $190/$225 call spread when the stock got to $190. That means we got filled near the open at about $9.70. I will likely keep this on unless we see a stock close beneath $181.11.

Now, as per a new trade, I do not want to be initiating any significant new standard equity positions until we get next week’s CPI and Fed data. However, I am willing to play a name that’s not in the regular corporate security world – more specifically, in the commodity space. And I’ve even picked one that is not dollar-correlated area of commodities, namely, natural gas. (This market trades on fundamentals and technicals, and is in many ways a uniquely different commodity to trade, as the influences that affect most commods do not impact this one.)

Yesterday, Natgas futures were down 10+ percent, and the chart shows that its associated ETF (UNG) looks headed for a move to its weekly TDST line at $16.38, which also happens to be where the uptrend line comes in from the April 2021 low and is where the weekly cloud’s Lagging Line would hit the bottom of its cloud. As such, as a conditional trade, when and if UNG gets to the $16.50 to $16.25 zone, we’ll then look to buy a 1% position in the Jan. 13th $16.50/$18 call spread at the then bid/offer mid-price. (Consider this and all conditional trades to be an active recommendation from me for a week after I publish it unless told otherwise.)

UNG – Weekly

Partial Closing Trades

• TSLA – 44.22% Loss: Sell to Close 1 Contract Dec 30th $195/$225 Call Vertical Spreads @ $4.29 Debit. DailyPlay Portfolio: By Closing the 1 Contract, we will receive $429.
• USO – 47.44% Loss: Buy to Close 2 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $1.15 Debit. DailyPlay Portfolio: By Closing 2 of the remaining 6 Contracts, we will be paying $230. Close another 2 Contracts before Market Close today, and another 2 Contracts by tomorrow.
• GNRC – 50% Loss: Buy to Close 3 Contracts Dec 23rd $100/$95 Put Vertical Spreads @ $3.00 Debit. DailyPlay Portfolio: By Closing 3 of 6 Contracts, we will be paying $900.

Investment Rationale

Stocks took it on the chin again. The press reports it’s from growing recession concerns, but really, they’re no more so now than they were a few days ago. The reality is that the SPX stalled right at its major downtrend line that had just before then seen a daily +13 signal, and all the post-Powell talk rally from last week has completely disappeared. Seems like we’ve seen this same story happen recently… because we did.

Yesterday’s downmove also significantly broke the uptrend line from the 2022 low, and now opens the door for a potential test of the unfilled highlighted gap zone from 3860 to 3818. With 3814 being the bearish Propulsion Momentum level, that 4-point zone along with the gap bottom becomes critical support for those bullish. At this point, I think the only way you see a Santa Claus rally is from a bullish CPI number and/or pivoting Fed next week.

SPY – Daily

Yesterday’s decline took out the TSLA $181.10 level that I wanted to see hold as support. As such, we will remove the $195/$225 call spread that we have on, leaving us with the long $190/$225 spread. I will monitor closely and potentially exit that piece by week’s end.

Crude oil settled down on the year on Tuesday. Who would have thought would be a possibility after earlier this year we saw it trading at $120/bbl.  As for our trade in its associated ETF, we’ve already exited 10 of 16 short USO $67/$65 put spreads we have on. With today having the weekly oil inventory report released at 10:30am ET, let’s take 2 more spreads off around 10am before the number comes out, and we’ll exit another two just before today’s close –  leaving the last two to exit tomorrow.

Our GNRC short $100/$95 Dec. 23rd put spread has now reached just beneath our $95 hedge strike. Though it is showing a weekly -13 this week (and not generally a time I’d sell), having discipline to exit half the trade when we’ve reached a 50% loss is more important to me than hoping that it holds here. So, we’ll buy back 3 of the 6 short spreads we have on today, and if we do shortly see a decent rally, we’ll still be able to make money on the trade.

GNRC – Weekly

Partial Closing Trades

• USO – 55.13% Gain: Buy to Close 4 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $0.35 Debit. DailyPlay Portfolio: By Closing 4 of 16 Contracts, we will be paying $140.
• ZTS – 120.21% Gain: Sell to Close 2 Contracts Dec. 16th $150/$160 Call Vertical Spreads @ $6.32 Credit. DailyPlay Portfolio: By Closing 2 of 6 Contracts, we will be receiving $1,264.

Investment Rationale

With the VIX down to near 20, I think we’re safe in thinking that the bulk of what we’ll be doing now will be buying option positions. This is clearly the lower end of where we’ve seen this vol index trade in 2022.

We deftly got into the Nov. 22 conditional USO short put spread a day later, when price got down to our target entry price of $67.10. We are short the Dec. 9th $67/$65 put spread from about 78 cents, and it closed at $0.345 mid on Friday. Let’s take 4 of those 16 spreads off today as they expire on Friday, and I’ll be looking to unwind the balance in pieces over the next several days.

USO – Daily

We are also long the ZTS Dec. 16th $150/$160 call at $2.87. With it having closed at $6.32 mid on Friday, today let’s take off 2 of the 6 spreads we have on to partially lock in the 120% profit we have in this position.

ZTS – Daily

Closing Trade

• VALE – 200% Gain: Sell to Close 5 Contracts Dec. 2nd $13.50/$15.50 Call Verticals @ $1.92 Credit. DailyPlay Portfolio: By Closing the remaining 5 of 10 Contracts, we will be receiving $960. We partially closed this trade on November 30 with 5 Contracts at a $0.64 Credit. Our average gain for this trade is therefore 189.85% and our average cost basis to exit this trade is $2.56 Credit.

Partial Closing Trade

• LEN – 64.67% Gain: Buy to Close 1 Contract Dec. 16th $82.50/$77.50 Put Vertical Spread @ $0.59 Debit. DailyPlay Portfolio: By Closing 1 of 3 Contracts, we will be paying $59. 

Investment Rationale

Yesterday was a pretty non-descript day in the market, right?  But did you know that volume was significantly larger than it was on Wednesday’s massive upmove? That means there was real selling on Thursday vs. a light-volumed runaway upmove the day before. So, which day is more significant? Well, I continually hear that long-onlys are not buying this rally; they’re more so selling into it.

Price has hit the major downtrend line from the all-time high, and that’s been the right place and time to be selling earlier this year. Don’t be afraid to do some again. (It’s not wrong until it is.)

SPY – Daily

Today is the key monthly employment report. Consensus non-farm payrolls is 200K and a 3.7% unemployment number. Will higher payrolls be taken as bullish or bearish? This year, I’d say higher is bearish, but maybe bulls will say that a higher number says the economy is humming and nicely handling the higher rate environment. At the same time, today could be a day that completely unwinds Wednesday’s rally if the numbers come in really hot.

With the VIX down near 20, I can pretty much tell you that despite my wanting to be an option buyer (vs. being a seller), I will virtually never buy a new option position on a Friday (as you automatically lose two days of theta because of the weekend). Today is also a weekly option expiration, so with the jobs numbers coming out, too, it’s more of a day to tweak your portfolio than it is to add to it.

Make sure you are out of our very profitable VALE $13.50/$15.50 call spreads that expires today. Let’s also reduce our position in the short LEN Dec. 16th $82.5/$72.5 put spread. We have three of these spreads on; let’s take off one today with us being up ~65% on it.

TSLA Bullish Opening Trade

View TSLA Trade

Strategy Details

Strategy: Long Call Vertical Spread

Direction: Bullish

Details: Buy to Open 1 Contract Dec 30th $195/$225 Call Vertical Spreads @ $9.70 Debit.

Total Risk: This trade has a max risk of $970 (1 Contract x $970).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a neutral to bearish trend.

1M/6M Trends: Neutral/Bearish

Technical Score: 2/10

OptionsPlay Score: 106

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. 

Please note these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

Investment Rationale

The Fed Chairman spoke; investors took what he said bullishly; and the SPX ran almost 3% to its best close since early September. So, everything is fine again, right? Well, Wednesday’s move higher also marked the SPY’s first daily +13 signal of the year (in this case, an Aggressive Combo signal) on a day that bulls got all they wanted to hear. To me, that’s not what you want to see to first now be getting bullish. (Almost all of our trades have been bullish ones since the October low was made.)

SPY – Daily

But here’s what you really need to ask yourselves: Did Fed Chair Powell just repeat a similar mistake to what he did in July – when investors badly misinterpreted his intentions to keep rates high and not pivot – or did he actually just tell the world that things have improved enough that their pace of raises can materially decline. (BTW: the market has figured that December would only see a 50 bp. hike for weeks already, so was yesterday’s overkill?

The Fed is now in a quiet period for the next two weeks until their next rate change announcement comes on Dec. 14th. That means Powell (nor his other governors) can walk back yesterday’s comments. It would have to come from some other source of theirs that they could potentially get the word out without actually stating them. (He often uses a WSJ reporter for just that situation.)

This also puts further meaning into Friday’s employment numbers:  Will the data support or conflict how bulls have just positioned themselves? (I’m hearing that the job creation number could be well above what’s Street consensus. If that’s the case, we could see today’s rally completely erased – and then some – on Friday. 

Personally, I find it hard to think that Powell had the intention of his words coming across as dovishly as the market took them. Time will tell.

———

A new option idea to consider playing is in Tesla (TSLA), which like many names yesterday did a complete turnaround. The weekly chart shows four unrelated reasons that this may have put in a trading low:

1. Last week’s low came within a few percent of its 200-WMA; 
2. Three weeks ago was Setup -9; 
3. Price held support in the mid-$170s from the double-bottom in 2021; and 
4. Price held against the bottom of the channel drawn against the downtrend line.

With the VIX collapsing to near 20, let’s look to buy a HALF POSITION (+- 1% risk on your total portfolio) in a TSLA Dec. 30th $195/$225 call spread today, and ANOTHER HALF POSITION IF the stock trades down to $191 to $189 by week’s end, in which case we’ll buy the $190/$225 call spread at the then current bid/offer mid price for these strikes.

TLSA – Weekly

MDT Bullish Opening Trade

View MDT Trade

Strategy Details

Strategy: Long Call Vertical Spread

Direction: Bullish

Details: Buy to Open 10 Contracts Jan 20th $80/87 Call Vertical Spreads @ $2.03 Debit.

Total Risk: This trade has a max risk of $2,030 (10 Contracts x $203).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a bearish trend.

1M/6M Trends: Bearish/Bearish

Technical Score: 2/10

OptionsPlay Score: 113

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. 

Please note these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

Investment Rationale

Medical device maker Medtronic (MDT) has had nothing but hard times in the past 15 months, being in a straight down bear market since its all-time high of Summer 2021. As bulls have continuously lost money, I’ve read that CNBC’s Jim Cramer “no longer recommends the name”. That’s the type move and public commentary that can really wash out what is already a badly beaten down name.

With that in mind, here’s what I see: Last week’s low bounced on the same level of what was the lowest Friday close of 2020 ($77.46), when the Covid sell-off crushed global equity markets. (I’ve displayed that line on the weekly chart below.) In addition, that same low also bounced on the recent weekly -13’s Risk level of $77.24. to me, this sets up a bullish counter-trend trade worth putting on. As such, let’s look to buy the Jan. 20th $80/$87.50 call spread today. On Friday, the spread closed at $2.03 mid, which represents about 27% of the strike differential – a very agreeable cost to absorb from an expiration that has just north of 50 days to go.

MDT – Weekly

ZTS Bullish Opening Trade

View ZTS Trade

Strategy Details

Strategy: Long Call Vertical Spread

Direction: Bullish

Details: Buy to Open 6 Contracts Dec. 16th $150/$160 Call Vertical Spreads @ $2.87 Debit.

Total Risk: his trade has a max risk of $1,722 (6 Contracts x $287).

Trend Continuation Signal: This is a Bullish trade on a stock that is experiencing a neutral to bullish trend.

1M/6M Trends: Bullish/Neutral

Technical Score: 3/10

OptionsPlay Score: 100

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. 

Please note these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

Investment Rationale

Stocks moved well-higher on Tuesday as the pre-holiday slowdown has already started. Less than 19 billion shares traded so far this week, the quietest two-day period in all of 2022. Though dollar and rate weakness might have helped fuel yesterday’s gains, Goldman Sachs was out with a note stating that they expect that next year’s close will be at SPX 4000 – essentially unchanged from exactly where that benchmark index is now trading.

American pet and livestock drug manufacturer Zoetis (ZTS) is the largest of its kind in the world. I’m interested in the long side of the name, because the weekly chart posted a -13/-9 bottom shortly before this year’s low was made, with subsequent price action to those signals halting right at the Risk level for the -13 (i.e., $132.87), with this year’s lowest weekly close at $133.67).

ZTS – Weekly

Then, when I look at its daily chart, I see a -13 count made last Friday that even without that signal makes me think there’s shortly going to be a move higher up to test its TDST Line at $161.69. Thus, let’s look to buy the ZTS Dec. 16th $150/$160 call spread. Yesterday, it closed at $2.875 mid, which is about 29% of the strike differential and generally in line with what I’m willing to pay for a slight OTM call spread.

USO Conditional Bullish Opening Trades

View USO Trade

Strategy Details

Strategy: Short Put Vertical Spread

Direction: Bullish

Details: Sell to Open 15 Contracts Dec. 9th $67/$65 Put Vertical Spreads @ $0.62 Credit.

Total Risk: This trade has a max risk of $2,070 (15 Contracts x $138).

Counter Trend Signal: This is a Bullish trade on a stock that is experiencing a bearish trend.

1M/6M Trends: Bearish/Bearish

Technical Score: 3/10

OptionsPlay Score: 91

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. 

Please note that this is a CONDITIONAL trade. We will only enter the trade when the condition is met, which is IF USO trades towards the $66.70 and $67.50 range. Also note that the cost basis, premium paid, as well as the number of contracts when we open this trade will therefore be different from what we post today. This condition is only valid until Friday this week.

Investment Rationale

China announcing some significant Covid cases and return to lockdown was not taken well by investors yesterday, though by the close we only saw the SPX fall 39 bps., but the NDX lost 1.06%. Crude oil made an early real decline on news that Saudi Arabia and OPEC+ were going to increase production, sending WTI down almost $5. Then headlines came out that they denied ever saying that, and crude reversed to settle at $80.04/bbl., just 7 cents lower on the day. (This is part of the reason why I both love and hate trading the crude oil market.)

In Monday’s Technical Outlook webinar, we talked a fair amount about the oil market, and that if one were going to use the US Oil Fund ETF (USO) to play the oil market, that one need especially understand that this ETF does not track the front-month price of WTI oil like you see quoted on your TV, but a weighted average of futures contracts going out a full year from that front-month, whereby the front-month’s weighting is only 15% of the total ETF price calculation. That means you can see oil show a higher quote on the day, but the USO actually have a negative move for that day because the back months in oil were trading lower that particular day. (This is what the whole spread market is about in futures markets, as in playing one month vs. another instead of trying to simply directionally bet on the price of a commodity.)

Now that I’ve explained that to you, I do think yesterday’s decline and then upmove had to wash out some shorts, and thus, maybe a near-term trading low was made. When I look more closely at where USO saw its heavy volume – and where it didn’t – I can get a clue into where within yesterday’s range players made the bulk of their bets. What I see is that from $67.10 +/- 40 cents, hardly anything traded relative to just about everywhere else in Monday’s range. That low-volume area often acts as a support or resistance level, and as such, if we see USO trade down to that level anytime between now and Friday’s close, we will look to sell the USO Dec. 9th $67/65 put spread for what is the then current bid/offer spread mid-price. Right now, the ATM/ $2 OTM put spread yields about 40% of the strike differential, a number I am usually very comfortable selling a credit spread for. I suspect we should get something like that same 40% credit-to-strike differential if we get a chance to buy this on a pullback into that range around $67.10.

USO – Daily

Next, please note as a general rule – and unless I state otherwise in a DP write-up – assume any conditional trade is good to enter for up to one week after I write the recommendation.

We do have an open conditional trade in LOW, which was to short a Dec. 9th $200/$190 put spread if we saw a pullback to near $200. (The low since I put that recommendation out on 11/16 has been $205.37.) I will adjust this recommendation to instead wait to put on a Dec. 16th $195/$185 put spread if the $195 area comes into play in the underlying stock (and not do the $200/$190 put spread). Note: I’ve also changed the expiration by a week.

LOW – Daily