Trade: -15 ATOS 8/6 3p for a $0.22 credit
Category: HT Wheel
Minimum Collateral to Enter: $270
Max profit: $330 | RoC: 9.12% | RoR: 7.91% | Collateral: $3,619 | Cushion: 13.12%
ATOS is one we've been watching because there has been some really solid premium due to some crazy price movement recently. See the chart since March:
After they announced a share offering last Thursday afternoon, the stock saw a severe dip down near $3/share. This provided us with a really nice entry opportunity. As we can see from the chart above it did bottom out at roughly $2/share so another 33% drop from here is definitely a possibility. It's always important to have our second and third moves in mind when we enter into a trade like this. Our current breakeven price off the bat is $2.78, which is seen by the red line below:
So it's not something that's super far away from anything we've recently seen like what we had with Zillow, but there are a few things we have going for us on this one. (1) The option chain/premium (2) RSI (3) Manageable breakeven price. Let's take a look through those.
(1) Option Chain: While we so often see smaller stocks that only offer monthly options or have large spacing between strikes or are illiquid, ATOS has really nice liquidity on weekly option chains with strikes that are spaced out at $0.50 intervals. This provides us a lot of flexibility when we move through the different stages of the HT Wheel since we're not restricted on something like $LOTZ where there are only 2.5 and 5 strike options. For example, here is what the weekly options look like for ATOS (with volume and RoR data):
(2) RSI: RSI is one of our favorite indicators in the stock market and lets us know when a stock is oversold or overbought. It's typically very accurate at predicting short term rebounds or corrections in stock price. The 180d RSI currently sits at 24 and anything below 30 is considered "very oversold". That would indicate we get some sort of a bounce in the coming week. The last time RSI got this low for ATOS was on July 19th, when the price rebounded from roughly $3.80 to $4.50 over the next 5 days. Here is the current 180d RSI reading:
(3) Manageable breakeven price: As we alluded to before, it's important to have your next move planned. We have $2.78 breakeven price off the bat on this trade but the aforementioned factors all contribute to what I believe should be a rapid decrease of our breakeven price on a week over week basis.
We're starting with roughly 33% of what we would be comfortable allocating to this position. Since we can see from the chart that $2/share could be on the horizon, we want to be very careful with how we scale into this. To plan out where we think we could get our breakeven price, let's take a look again at the option chain for the upcoming week.
ATOS closed at roughly $3 on Friday so we can consider the $3 strike to be an "at the money" option. On the call and put side it offers roughly $0.30 of premium. Now that may be a little inflated because of the sharp drop at the end of last week, but I imagine we could get somewhere in the neighborhood of $0.20-0.25 come next week. Just on the covered call side alone (assuming we took assignment) that would get our basis down to 2.53-2.58. And then if we factor in the cash secured puts to enter into a strangle in accordance with the traditional HT Wheel strategy, that would drop our basis another $0.20-ish to get us with a projected breakeven price next Friday of 2.33-2.38, which is plotted by the red line below:
As we can see, that's a much more manageable breakeven price and looks a lot better on the chart.
Exit Strategy: I plan to hold these until expiry and then run through the HT wheel by taking assignment and executing the trades outlines above if ATOS finishes up this week below $3. If ATOS shoots back up and we have the opportunity to close out for 75-80% of max profit by Wednesday, I'll also take that.