3 Strategies to Play the Bounce
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3 Strategies to Play the Bounce

Henry Gambell - January 19, 2016

Good evening, everyone. This is Henry Gambell with SimplerOptions.com. In today's free video, I want to give you three different ways to look at playing any underlying that you're approaching in this market. I think it's a little bit of a tricky situation, because from some perspectives--and AMZN is a great ticker to talk about this--but from some perspectives, you'd say, "This squeeze has still fired short." There's no reason to fight a short squeeze until the momentum has truly reversed.

We could also say that this is a bit oversold. It's a far cry from its 21 period moving average, and the snap-back could be coming at any time. All of these are valid arguments. Here are a couple of ways that I will look to play them this week, and into the next. Now, when we look at a chain of AMZN--a good example--just be mindful of your implied volatility. When you see these sharp jumps in the IV, you know this is probably the series where AMZN will report earnings. So if I want to play it technically, I can use these options with 4 days of life left. If I want to play it more off of the implied volatility, and around earnings? That's where I will step out these 11 days, and focus on those contracts.

For the sake of today's discussion, let's keep this here in the January weeklies. The three ways that I would look to play this: First is just an iron condor. So, 550 I think will offer a decent area of support, and 600 will offer a decent area of resistance. That iron condor is going for about a $2 credit, if you do it 5 wide. If you get filled on that, and the market really starts to catch a bid this week, maybe tacking on an extra 550 short put, worth the reversion to the mean. That's one way to play those.

Another way, all still here in the January front week options, is something like a broken wing butterfly. I would wait to put this on, to see if we're actually going to see some strength from the indexes this morning, Of course, if we open up down hard on Tuesday, you can still apply these strategies, but you may adjust the strike you're looking at. Let's say right here, looking for a bounce on Tuesday into Wednesday. If that can really get some strength, I will look at doing things, like buying a 580, selling the 585, and then breaking the wing of this, so if AMZN explodes higher, I won't lose money to the buy side. I won't do as well as if it hovered near 585, but breaking that wing makes that more of a feasible strategy if the short covering rally really does take hold. It's also a fairly inexpensive strategy.

The third one--and this is a bit more of a Hail Mary--it's interesting in AMZN because they have earnings, and because I think 600 could be an attractive strike price. Not to mention, the expected move would take you exactly into 600. This is a bit of a long shot but the idea of doing a 10 wide butterfly around 600 This is going around $0.65 or so. If AMZN really does catch fire--you're essentially risking $0.65 trying to make $8.00 or so. Obviously the max profit on butterflies is rarely realized. But if you can get above $5.90, things get interesting. I think it makes for an interesting risk/reward ratio.

There's three different ways to play it, depending on how you like to structure your options trades. Hopefully that helps, as we get into the earnings season, and navigate this higher volatility. I will see you at the next free video.