Updated: Dec 31, 2020
Happy Holidays and welcome to the first installment of the weekly Hourglass Trader investing newsletter. We previously would communicate this information via a wall of text in our Discord chat, so I hope this newsletter will serve as a better way to communicate the information we share each week. With this being the first newsletter we may have some technical issues, so if anything looks odd formatting-wise or you run into any other problems while reading this, please let us know so we can try to correct it. We want to try to reach the biggest audience as we possibly can so if you enjoy this newsletter, please share the signup link with your friends.
An important item to note is that this trading week is a short one due to the Christmas market holidays at the end of the week. The market will be CLOSED for trading on Friday, December 25th, and will close at 1pm on Thursday, December 24th. That means we effectively only have three and a half trading days this week. This is great news for us because it means that our option expirations will arrive even more quickly this week, but at the same time it’s important to monitor your positions carefully because the end of the trading week will sneak up quickly.
Last Week’s Performance
Our trade ideas from last week performed really well, as our picks went 8-0. That takes us up to 11-0 for the month of December. These SPAC covered call plays have offered some great premium and the high percentage plays we’ve made on those have really paid off. While SAMA is the only ticker we hit a max profit on, the other plays returned a modest profit thanks to the option premium that we were able to collect. The option premium on those has dried up a little bit, but there still are some decent opportunities out there that we’ll discuss further down as we talk about this week’s picks. But as far as our December performance is concerned, things have gone about as well as we could have possibly hoped for. We’re looking to finish out the year on a high note as we move into this week’s trade ideas.
This Week’s Best Returns
Below we’ve compiled a list of the most profitable puts available to sell with expirations this week. When we run this scan we subject it to certain volume constraints, so you can be assured that all puts listed below have enough volume for you to join in on the action. It’s important to note that these are just objectively the puts that offer the highest returns this week. Just because something is on here, doesn’t mean it’s a good trade idea. The purpose of this is just to be used as a starting point when coming up with trade ideas. The RoR column represents Return on Risk, which is the metric we use to evaluate a put option’s profitability.TickerStrikeReturnQS7210.68%QS7110.51%QS708.78%QS698.32%NVAX1256.97%TSLA6706.86%
In order to avoid clogging up this newsletter we only included the top 6 results. If you would like to see the full table of results, which includes almost 100 options, view the full post on our website.
THIS WEEK’S TOP IDEAS
HYLN 12/24 16.5p
RoR: 2.17% | Probability of Max Profit: 71.75% | Downside Cushion: 7.77%
After dropping back down to a new short-term low last week, HYLN bounced back nicely towards $19 before eventually closing at $17.51 on Friday. We love the value on this play, and the variability in stock price has created some really solid option premiums for us to take advantage of. HYLN’s warrant redemption period lasts until the end of December, so until then I like the more defensive play that the 16.5p offers if you’re looking to enter into a position. The following is the 20d chart for HYLN:
Pretty big range on the share price, peaking at $27.53 and bottoming out at $15.35. Trading at the low end of that range I feel this is a great entry point to a stock I believe is positioned for long-term growth in the green energy space. Thanks to the premium these offer, your basis on HYLN will be $16.15. Once January rolls around I think we could see a really nice rebound from this ticker.
SPCE 12/24 23.5p
RoR: 3.34% | Probability of Max Profit: 58.16% | Downside Cushion: 1.4%
After needing to abort a launch, Richard Branson’s Virgin Galactic (SPCE) saw a downturn that resembled the path of a failed rocket. See here:
While it’s obviously not ideal that the company had to abort a launch, that is part of the process with any company involved in the space industry. We view this as an opportunity to take advantage of SPCE option premium now that the stock looks like it’s past a big drop. There was an additional drop due to reported share dilution, but Virgin Galactic Chariman Chamath Palihapitiya stated that the dilution was misreported. Make of that what you will, but we feel like this is a good opportunity to jump in on selling a cash-secured put and take advantage of what looks like a momentary overreaction in stock price.
PSTH 1/15/20 Covered Calls, $30 strike
Max Return: 22.8% | Prob. of Max Return: 20.50% | Downside Cushion: 3%
SPAC’s have been all the rage lately, as many investors view them as a low-risk, high-reward play due to the nature of the acquisition companies. PSTH is the SPAC run by billionaire investor Bill Ackman, who has floated the idea of several different high value acquisition targets that he is looking to merge with via this SPAC. The acquisition company started trading in the low $20’s so there looks to be a somewhat limited downside from Friday’s closing price of $25.04.
The “high-upside” of this SPAC is reflected in the call option premium, where we can find a 30c for Jan. 15th selling for a $0.775 premium. That means we’ll bank a return of 3% if PSTH just trades flat until then. If it announces a merger target and spikes up past $30, that’s when we’ll really see a nice return as we’ll collect that call option premium in addition to an almost $5 gain per share on the stock. With your basis effectively being at $24.27, this is a low-risk, high-upside play that looks to take advantage of the SPAC momentum we’ve seen recently across the market. Questions on how this play works? Check out our video on covered calls.
GHIV 1/15/20 Covered Calls, $12.5 strike
Max Return: 21.5% | Prob. of Max Return: 24.77% | Downside Cushion: 4.85%
This is another play that’s super similar to the idea that we have presented above. GHIV is a SPAC that is planning on merging with one of the largest mortgage companies in mid-late January. To demonstrate the downside risk, let’s look at the chart since this SPAC’s inception:
With a low of $9.60, GHIV seemed to form a base around $10 between October and December. This “price floor” is mostly based on the net asset value of the SPAC (aka Cash), so this should be a pretty good support level for the time being. Another great tidbit about this company is that post-merger, they plan to pay a $0.40 dividend, so even if your shares aren’t called away for max profit, this definitely seems like a company that should be a decent long-term investment opportunity. Thanks to the premium these calls offer, your basis in this play would effectively be $10.20 based off the closing price of $10.72 this past Friday. If these shares aren’t called away by Jan. 15 then the February set of calls offers an even better premium so it shouldn’t be too difficult to drive your basis back down below $10.
ROKU 12/31 360/365c
Risk to Reward Ratio: 3.46:1 | Cushion: 5.9%
If you’ve followed us for a while, you’ll know that we love playing stocks down that are ridiculously overbought. ROKU fits the bill here. Take a look at the run it’s been on in the past 20 days:
A 50% run on a stock this large is very unlikely to be sustainable. RSI indicates ROKU is overbought right now so we’re expecting a drop in the near future. This credit spread gives us time to wait and a little bit of a cushion in case we’re wrong. How big of a cushion is 5.9%? As long as ROKU remains below this red line by the end of the year, we’ll hit max profit:
A 5.9% profit should be plenty as we attempt to collect some nice premium at what we believe should be close to the end of this big run for ROKU. If we’re wrong, we’ll just roll the strikes higher and out to a further date. This worked perfectly on our last set of ROKU spreads, where we started playing ROKU down from a price of $300 as we were able to roll up our spreads and put ourselves in a position where we still made profit as long as ROKU finished last week below $345, which it did. One important point to make on this play is that you should start small. Logic would suggest ROKU is going to cool off, but any stock this large that runs from $250 to $350+ in such a short amount of time has clearly defied logic up to this point. Starting with a small number of contracts will give you the flexibility to roll your strikes up and out at a larger position to help you manage if this one moves against us.
Bonus Discussion: TSLA
So with S&P inclusion coming on Monday for TSLA, we can say we’ve almost made it to “the big day”. There was a little spike AH on Friday that took TSLA towards $700. If it reaches the $750-800 level I think this is going to be perfect for a call spread. The catch though is that we’re going to have to stay patient. If us being over-patient results in us missing the peak, then so be it. It’s way better to miss out on a good trade than be stuck in a bad trade. This truly is an unprecedented event and it’s genuinely interesting to see what will happen come Monday. We anticipate that there will be a pretty big spike on inclusion day. Why? Because when you look back in history, one of the closest comparisons would have to be Yahoo’s S&P inclusion, which looked like this:
If the past is any indicator of the future, we might see prices a lot higher than $700, and this is what we’re basing our investing thesis off of. As far as strikes and expiration dates are concerned, it’ll all depend on how the credit for call spreads looks, which is something that will be impossible to predict. I like the idea of a call spread 2-3 weeks until expiration, which should give us plenty of time to wait for a drop. If it doesn’t happen and we never find a good opportunity to enter the trade, we’ll just take our money and move onto the next opportunity.
Stocks from the Chat
So in addition to the trade ideas that I’ve presented above, we always ask members of our Discord chatroom to let us know what stocks they want to see analyzed. Here are those stocks along with some brief analysis and considerations. Want to participate in the discussion and suggest some stocks for next week’s report? Join our Chatroom.
VERU: Pretty crazy chart on this one, going from roughly $3 back on Dec. 8th and peaking at $12.19 before market open on Dec. 15th. So with that said, some huge risk here. There are monthly options available, expiring on Jan. 15th. The spike in price alone is enough for me personally to not play it, but if you are looking for a good way to do so, a cash-secured put might be the best way. The 1/15/15 7.5p are trading for a $0.875 premium, meaning that your basis upon assignment would be $6.63. That’s a pretty steep discount from the current price of $8.80, and these puts offer a 13.21% return on capital risked. That’s really solid, but of course the risk is that it reverts to the $3 level and you’re sitting on a 50% loss upon assignment. Big potential returns here but that clearly comes with some considerable risk.
PLTR: After its huge surge over the past month, this has been one of the most talked about stocks on the market. For me personally the valuation is a little too rich for me to initiate a position. Call premium is great though so it’s a really solid candidate for the HT Wheel strategy, which many of our members have been successfully running for the past few weeks. I said last week that I think there will be resistance at 30 and support at 24, so I’m personally waiting for it to get into the $24 area before considering initiating a position here. If you are bullish on it and want a play you can make now, I like the 12/31 25p. It offers a 5.26% return on capital risked, which is a really, really solid return. Additionally, it would give you a basis of $23.75 if assigned, which sits you right below that support level of $24.
CLVR: This is the newly-minted ticker that resulted from the SAMA merger. The SAMA play hit max profit for us so this is one that’s near and dear to my heart. I am bullish long-term on the cannabis industry due to the new incoming administration in the United States, and this is a solid name to play that with. May not be a surprise here, but cash-secured puts look like the way to go to get in on this one. Looks like Jan. 15 12.5p are offering 1.60 in premium, which represents a 14.68% (!!) return and puts your adjusted basis at $10.90 if assigned. With the price floor presumably around $10 here, that’s really solid value. If you want to get riskier you could roll with covered calls but due to the volatility that the post-merger environment typically generates, I think the defensive play of selling a put is the best move here. To kill two birds with one stone here, TLRY has been our go-to cannabis play for a while, but the recent merger has kind of turned me off to their new valuation. I’m not certain a merger will make TLRY any better of a company so I think if you want to make a cannabis play then CLVR is going to be your best option with the aforementioned play.
QQQJ: This is an interesting one. This ticker is an ETF that is based on not the top 100 companies, but the top 101-200 companies. You can view their holdings here. If you are of the opinion that there’s a little bit of a bubble at the top, this may be a good place for you to park some money. Option premium just really isn’t there though so this is one that I think would be a decent buy and hold long-term play.
FSR: This is one we had in our trade ideas last week as we recommended a 14p that played out nicely. I’m still of the opinion that the $14 range is a solid entry for this stock so with a closing price of $16.13 on this ticker last Friday I would recommend just hanging tight and letting this one fall a bit.
So that’s all we’ve got for this week. If you made it all the way to the end, thanks for sticking with us. We’re hoping this was a much easier way for us to distribute the info and for you guys to digest it. We’ve launched our website, where this newsletter will be available in the form of a blog post. 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 and our chatroom. The links to do all of this are below. Thanks for reading and let’s have a great week.