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Trade Ideas and More for the week of 1/3/21

Happy New Year and welcome to the third edition of our weekly trade ideas newsletter. We just wrapped up an incredibly successful 2020 and hope to keep building on that success going forward. We’ve had our strategy tested to its limits when things moved against us (thanks to HYLN) and have seen it provide great returns when things went as planned. All in all, the good with the bad, we finished +165% this year. We’ll recap that below and then get into new trade ideas for the new year and have a brief discussion about 2020 taxes and how they’re relevant to our strategy. Let’s jump into it.


Last Year’s Performance

As mentioned above, we finished with an incredible 163.93% gain in 2020 thanks to the strategies we’ve employed throughout the year. We learned a lot of lessons this year and are excited to take what we’ve learned and apply it to 2021. While our return in 2020 was incredible, it didn’t come without its fair share of bumps in the road. To best illustrate that, take a look at our performance down the stretch this year:

What we will affectionately refer to as the “HYLN Disaster” threw a huge speedbump in what was a year that had relatively few issues up to that point. One of the biggest questions we get is “What happens when things go wrong?”. This is example A, and may quite literally be the worst it could possibly go. We had a stock that we were basically all-in on (Mistake #1) at the peak (Mistake #2) drop about 75% on us. As you can see it caused some serious pain, but the fact that we were still able to take a $47k loss in October and still finish the year +165% is as good of a testament to our strategy as there can be. We’ve adjusted our position sizing and diversity since then so if we run into another “worst-case scenario”, it won’t have nearly as big of an impact. These adjustments worked beautifully in November and December and we’re excited to see if we can’t get more of the same as we start off 2021.


This Week’s Best Returns

NOTE: These are just objectively the best weekly returns out there in the market. By no means are we claiming that these are a good investment idea, but they are useful as a starting point when forming trade ideas. For the full list of almost 100 options, check out the post on our website.


This Week’s Trade Ideas

HYLN 1/8 16p RoR: 4.4% | Probability of Max Profit: 54.32% | Downside Cushion: 6.97%

We kick off this year’s trade ideas in a similar way to how we ended it. This is a stock that has a ton of value for the premium it offers at this price level. A 4.4% return in a week is HUGE. Protection against a 7% drop is even better. If those two points aren’t enough for you, let’s take a look at the chart:

The red line is drawn at $16, which represents the max profit level for us on this trade. $16 has acted as decently strong support over the last few weeks. The one time it broke below $16, it surged up to $19 within two days. I strongly believe at this price level that these 16p offer some of the best value on the market for option sellers, period. If all of that isn’t enough for you, here’s another tidbit: HYLN’s warrant redemption period, which caused a pretty big beatdown on the price recently, just ended on December 31st. Think we’ll see a decent climb from here as we head into 2021 with that period of uncertainty behind us. I wouldn’t be surprised to see some analyst ratings start rolling out soon.

RKT 1/8 20p RoR: 2.43% | Probability of Max Profit: 54.6% | Downside Cushion: 3.46%

This is another one that we like to check in on every now and then because it typically trades in a pretty tight range between the high teens and low $20’s. With its recent dip down to $20.22 as of close on Friday, these puts offer a decent entry back onto the stock as it begins to move towards the low end of the range. Here’s a look at the chart dating back to mid-October:

The long red line is right at the breakeven price of this trade, a price level that RKT has held above for a pretty decent period of time. If it goes against you, don’t panic. Just hold until the extrinsic value is gone, take assignment of shares, and start selling calls which offer enough premium to drop your breakeven price below $18 by January 15th. Really solid value.

FSR 1/8 14p RoR: 3.36% | Probability of Max Profit: 63.08% | Downside Cushion: 7.57%

Here’s one that we previously mentioned we had our eye on, but were waiting for a better opportunity. After a roughly 12% drop last week, this is the opportunity we were waiting for. With a closing price of $14.65 last week, these puts have enough premium to put your breakeven price down around $13.50, which as mentioned above is a cushion of almost 8%. The long(ish)-term support for FSR is right around $14 and if that breaks there’s a gap down to the $12/13 level.

Could this one drop that much this week? If we knew the answer, we’d be rich. What we can tell you though is that if things go against us on this one this week, there’s plenty of premium on the 1/15 calls to keep driving that basis down. As of today the 1/8 15c offer $0.65 of premium. That’s about what we would expect the 1/15 calls to offer this Friday if this trade moves against us and we need to sell covered calls on Friday.

UVXY 1/8 10p****** RoR: 4.66% | Probability of Max Profit: 61.56% | Downside Cushion: 10.3%

******We’ll include the asterisk right at the top of this one because it’s super important. This play is a general hedge against the market. Do NOT make this your only play. As the year turns over, there could be some uncertainty in the market caused by the new administration in the United States and the GA senate runoff on January 5th. We don’t anticipate that this will do anything too crazy, but just in case it does we want to have a position that protects us in the event that volatility picks back up and we see a pullback. This accomplishes that. For some further context on why this is a good opportunity now and not necessarily at other times, let’s take a look at the 1-year chart for UVXY:

As you can see, we’re reaching levels for UVXY that we saw pre-covid. Does this mean volatility has returned to pre-covid levels? No. UVXY naturally decays over time and spikes on volatility increases since it’s a leveraged instrument that tracks VIX. Because of that it offers some great premium and running a small position on it via the HT Wheel strategy at these levels is a great way to hedge your long positions. The goal here is to be in and out within a couple weeks. This is not something we want to hold long-term, as you can see from the trajectory of the chart above.


Stocks From the Group

(1) Macy’s (M): After circling the drain and looking like a prime bankruptcy candidate, this stock has seen a recent reemergence. However I really don’t see a lot of value here. Revenue is in a downtrend and unless they make some sort of material change to their business, I don’t think they’re going anywhere. Investing in this company is essentially gambling. They have options, so that’s one approach you could take. The issue though is that these options don’t really offer any premium for how risky of a play it is. Back in November Macy’s was trading around $6 a share. Last Thursday it closed at $11.25 which essentially means that it’s doubled in the last two months. Not ideal for an entry point and I would stay away from this one.

(2) Northern Genesis Acquisition Corp (NGA): This one is a SPAC which announced back in November that they would be merging with The Lion Electric Company. Like many other SPACs we play, they have a price floor in the $10 range but the issue here is that it closed at $18.40 last Thursday. That means you’re basically paying an 84% premium for shares in this company and that’s way too high above the price floor for our option selling strategies to be effectively used. Additionally, this may get hit pretty hard when/if the EV hype starts to die down.

(3) Golden Nugget Online Gaming (GNOG): Previously a SPAC, this online gaming merger was completed at the end of 2020 and saw a big spike up to $28.10 before closing at $20.29 last week. I’m bullish on gambling stocks as we head into 2021, but it’s important to keep in mind that this was another SPAC that had a $10 price floor. $20 is an important level of support on this stock and if it breaks below that, it could see $15-18. I would sit back and wait for this one to fall a little further before initiating a position. DKNG has a much better entry if you’re looking to get in on some gambling stock action.

(4) Bed Bath & Beyond (BBBY): Reporting earnings Thursday morning, this is an interesting one. Earnings create premium, and there’s a lot of it on the puts for 1/8. A 16p offers a 4.37% return and has a 66% chance of hitting that max profit. The issue though is that BBBY, like many other stocks lately, has been on a pretty solid run over the last 180 days. Back in May it was trading at $5. By August it was up to $11. In October it peaked at $26 before falling back down to where it currently is at $17.71. So in the context of the year, it’s basically tripled over the last 180 days. On the other hand it’s dropped about 35% in the last two months, so this could be a solid entry point. The 20-day RSI is 24.18 which indicates it’s severely oversold.

At the end of the day it all just comes down to your opinion of how you think they’ll perform during earnings. Does Covid completely ruin their financials, or will they beat estimates and provide solid guidance for the future? That part is up to you. It hasn’t traded at levels this high since 2018. I tend to try to focus on strategy, so if you think this is a good bet headed into earnings, selling cash-secured puts as a way to give yourself a cushion in the event things go south is a really great way to play this. Personally I have no opinion or expertise on retail performance right now so I won’t be playing it.


Bonus Discussion: Taxes

Now that 2020 has wrapped up, it’s a great time to have a discussion about taxes and how they are relevant to our strategy. The short answer is that since our gains are short-term in nature, they’ll be treated as regular income and taxed at the same rate as what you would make from employment.

Although rare in the context of our strategy, if you ever hold a position for 12 months, it becomes a long-term capital gain and is taxed at an advantageous rate. So if you get to the point where you’ve held stock for 9, 10, or 11 months it might be a good idea to hold onto it for a full year so you can take advantage of the long-term capital gain rates.

Another important point to make is about wash sales. In short, a wash sale means that if you sell a stock at a loss and purchase a “similar” security in the following 30 days, that loss is temporarily disallowed. Now you’ll be able to take that loss eventually, but if you decided to dump your losing positions at the end of 2020 to take the losses for tax purposes and reopen them in January, you may be in for a little bit of a surprise. For a list of what constitutes a “similar” security, there are some useful charts on this page.


And that’s all we’ve got for this week. If you made it all the way to the end, thanks for sticking with us. Our goal is to keep generating quality content and keep it FREE for everyone. In order to help us accomplish this goal, we ask that you consider a one-time or recurring donation to support us. We understand that everyone’s financial situation is different, so if you don’t have the means to do so, by no means should you feel any pressure to do so. The best ways you can help us outside of a donation are by helping us grow the newsletter, our chatroom, and helping drive traffic to our website. The links to do all of this are below. Thanks for reading and we hope you have a great week.


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