What do you think about the move in semiconductors today? SMH smashed through diagonal resistance, but remains a couple of bucks below some pretty major horizontal resistance. Money flow has moved to the upside, which suggests institutions are buying. Here's the Chaikin take on SMH prior to today's price action (Chaikin Analytics updates prior to the beginning of each trading day). Until this morning, the SMH ETF Power Gauge was neutral and relative strength vs. SPY pretty weak. The ETF is also overbought and below a falling Chaikin long term trend. So, how do we trade it?
That's where options come in. I favor a neutral to bullish strategy using a skewed double calendar. Yeah, this is deeper-end-of-the-pool-stuff, but it's why having an options education gives you more than just UP/DOWN trading alternatives. In the case of this trade, here's the set up using the option analysis tool. It rewards me if price ends up lower or higher than tomorrow's planned entry.
'I'm respecting the fact that price broke out to the upside and institutional money flow supports pushing the stock higher. However, I think the stock's price advance will get delayed by significant overhead resistance, which is confirmed by an overextended OB/OS Chaikin oscillator. So may trade leans bullish. But I give myself a little room for the stock to pull back and retest former resistance as new support before moving higher. The red lines above and below represent my breakevens on the trade (see below). As long as price stays within the red lines between now and expiration, I'll make money.
Of course, I won't be waiting around to see if I make max gain. All I'm looking for out of this trade is about 10% - 15% return on risk. I'll buy 7 double calendars at $2.12 per contract. So my risk is around $1500. I'll be happy with $200 return in under 60 days. That means selling when price moves to about $2.40 per contract. Of course, I'll be paying round trip commissions on a four legged spread. So, that's $60 round trip. Still, $140 return on $1500 on risk is my likely upside if all goes well. Not bad. But, commissions suck. What would you do? In the money diagonal? Bull put spread? Long call vertical?