Welcome to the fourth edition of our weekly trade ideas newsletter. We just wrapped up the first week of 2021 and it was an awesome one for us and our members. We finished with a 4.25% weekly return which crushed the SPY return of 2.26%. It was a great jumpstart to the year and with several of our longer-term plays expiring this week, we’re looking to keep it rolling. We’ll recap last week’s trade idea performance, provide some more trade ideas for this week, and then analyze some reader-submitted stocks. Let’s get into it.
Last Week’s Trade Ideas
A great start for our newsletter in 2021 as all four suggestions finished with profit. RKT was the only selection that didn’t hit max profit, but was only 4 cents away from doing so. So far so good as we head into our trade suggestions for this week.
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 Note: These are all option SELLING plays
HYLN 1/15 16.5p
RoR: 4.04% | Probability of Max Profit: 60.02% | Downside Cushion: 8.16%
If you’ve read our newsletter before, you probably didn’t expect anything different from us as our first choice. This remains one of the best put-selling values on the market with the premium it offers combined with the range it’s trading in. The 4% weekly return on something that’s decently OTM is an incredibly good opportunity and we’ll continue to jump at these for as long as we can. Basis upon potential assignment on these is below $16, which is a great place to start out HT wheel strategy from.
CLVR covered calls, $10 strike (Jan and Feb expiry—we’ll explain) Max Profit: 15.4%-28% | Downside cushion: 10.9%
Formerly SAMA, this cannabis stock has had a pretty steep downturn in the past couple of weeks after they finished a reverse merger to go public. The NAV of the SPAC that they merged with was roughly $10, so the closing price of $8.83 on Friday is a pretty big drop below that level. Let’s take a look at how this post-merger selloff looked:
After peaking at $14.59, this stock is currently at an almost 50% discount off that high. This is a great entry point and we’re recommending covered calls to play it since put premium is basically non-existent (an indicator that there isn’t too much more downside from here in the near future).
The first recommendation is to sell Jan. 15 10c. These offer about $0.17 of premium as of last Friday and would put your adjusted basis at $8.66. From there, you’ll either have your shares called away for a gain of 15% in one week, or you can sell Feb. 19 10c for a premium of roughly $0.80 to take your breakeven/basis all the way down to $7.86. Not bad at all for one month. If your shares are called away in February, that gain would be almost 30%. In conclusion, a great entry point on a stock that offers some great potential upside in such a short period of time.
GHIV 1/15 12.5p RoR: 5.26% | Probability of Max Profit: 57.69% | Downside Cushion: 6.46%
This is one that we’ve been playing since back in December when it was below $11. And while it has run up past $12.50 since then, I think there is still some decent opportunity here thanks to the option premium. When you talk about SPAC risk, a lot of it revolves around the merger. The great part about these options is that they expire about a week before the merger. Because of that, you can be in and out without having to worry too much about the downside.
But what if GHIV does drop this week and we lose money? The answer is that you’ll be assigned with an adjusted basis of $11.88, which is a great spot to start the HT Wheel strategy. The merger puts some great premium in those February calls so you can drop your basis by an additional $1-3 (depending on which calls you sell). Getting that basis down around or below $10 is a great place to be for the long run which is why we like the idea of selling these 12.5p to kick this week off. And not to mention, if GHIV stays flat or goes up over the next 5 days you won’t need to worry about any of that as you can collect a cool 5.26% return in just one week.
UVXY 1/15 10p****** RoR: 5.88% | Probability of Max Profit: 52.04% | Downside Cushion: 6.95%
******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.
This was introduced last week when we wanted to hedge against any potential politically-driven drops in the market. We stated that we didn’t expect anything too crazy to happen after the US Senate elections and that may have been the understatement of the year. Regardless, the play we suggested last week hit max profit despite an almost 2% increase in the overall market. That’s the beauty of selling OTM puts.
We’re including this again on here this week because we get the nagging suspicion that things might be going a little too well. If the market keeps rising we’ll keep making money hand over fist. If it pulls back a bit, we’ve got this play taking up about 5% of our overall portfolio to help us out in the event of a dip.
High Risk High Reward: CNET 1/15 3p RoR: 29.03% | Probability of Max Profit: 40.04% | Downside Cushion: 24.59%
This one was at the top of our scan for the highest premium puts on the market and it’s just too hilarious to pass up. A 30% return in one week AND it’s profitable as long as this stock doesn’t drop 25% over the next week? Sign me up. In all seriousness though, let’s actually evaluate this opportunity. What I hate is the low price of the stock, as it’s bordering on penny stock territory. It’s also a Chinese stock, which in general I am leery of due to the potential of fraud thanks to loose regulations (see Luckin Coffee) and the lack of ability for foreign investors to actually own stock directly in Chinese companies. For example, did you know that if you own NIO stock you actually own stock in a VIE registered in the Cayman Islands? Let’s get to what we like here.
As stated above, the premium is hilariously good. You have a 40% chance of tripling the S&P average yearly return in just one week. They also recently announced a strategic partnership which caused the stock to shoot upwards. One of the best ways to look at a trade like this is “What happens if this goes poorly”. Let’s take a look at the 20-day chart:
A chart like this isn’t too surprising to see because those option premiums exist for a reason. So let’s assess downside risk. Using short-term support, there looks to at least be a solid base around $1.50. If assigned on these puts, your basis would be about $2.35. From there you could sell February 3c which currently offers $1 of premium. That would drop your breakeven below that $1.50 support in just one short week. There’s a pretty solid path to driving your breakeven price down near $0 within the year. If things go poorly, this is one where we can really lean on the options and be able to rescue our play with little difficulty.
The risk here is that the stock goes to zero or is delisted in the next six months. For that reason, I’m not opening a very big position here. It’s also important to keep our HT Wheel position sizing concepts in mind when starting this play. Leaving yourself room to jump into covered strangles will also further drive down that basis. You could conceivably have a basis at or below $1 here in a couple of months. For that reason, we’re going to lean on the value that our strategy provides and give this one a shot. Do not invest any money here that you can’t afford to lose.
Stocks From the Group
(1) Dropbox (DBX): I’m glad this one was suggested because after reviewing it I think it’s a really solid value for the strategy that we run. A nice and (relatively) stable stock tied to a good company that has traded in a $14-25 range over the last 180 days. Additionally, it traded up above $30 back in 2018 so if it can regain those levels that would represent a really solid return from the current price of $22.50. Now due to this stability the option premium isn’t crazy, but you can still scalp a nice 1-2% per week on some higher probability options. 22p offer 1.78% RoR on a 61.68% probability of max profit and the 21.5p are a little safer, offering 0.99% RoR on a 74.46% chance of max profit. Don’t think you can go wrong with this one at these levels.
(2) Clover Health (CLOV): Formerly IPOC, this SPAC completed its reverse merger recently and is now trading under its new name. As mentioned previously, the big risk associated with SPACs is post-merger. See the CLVR chart above. Because of this, it’s important to take a step back and look at the potential downside. Here’s the CLOV 180d chart:
As you can see, it’s pretty far above the NAV of roughly $10 that this SPAC had pre-merger. That represents a roughly 62% premium on the stock just from the merger itself. Does completion of a merger justify that much of a premium? In my mind, the answer is no. I have no opinion on the long-term performance of this company itself, but I would imagine you could find a better entry point on it at some point in the near future. February 12.5p and 15p both offer some really solid premium to help you find that better entry point.
(3) Ebang International Holdings (EBON): I have never heard of this company, but Thinkorswim tells me it’s a Chinese holding company that is involved in chip design and manufactures bitcoin mining machines. Seems like the perfect storm to create a ridiculously speculative hype stock. That’s not my thing, but if it’s yours, there actually is some decent value from option selling here. Try to keep up here: In the last 180 days, EBON has (1) bottomed out at $3.80, (2) spiked to $15, (3) dropped back down to $4, and (4) spiked back up to $8 before arriving at its current price of $6.90.
This is another play that offers some absurd premium due to an incredible amount of volatility. The February 5p offers about $1 of premium, which represents a 25% return at max profit and would put your breakeven price at $4, giving you a 42% downside cushion. The fact that you can make money over the next month as long at this stock doesn’t drop 42% is laughable. If it drops a ton on you, the volatility offers some serious premium on calls so you could drive that basis below $3 no problem. As much as I hate stocks like this, I actually don’t hate the value these options offer from a selling perspective.