Rotation of Capital Causing a Pull Back in Tech

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Talk about your parabolic moves! Are you asking yourself what is a parabolic move? If so, look no further than UnitedHealth Group, Incorporated (NYSE: UNH) or Caterpillar, Inc. (NYSE: CAT) over the past 6-trading days and you can actually see it on the charts.

The Nasdaq, at the time of this writing was under a great deal of selling pressure, trading down around 2% on the day thus far. The reasoning being spoken about is investors worry about US export curbs on China and former President Donald Trump’s stance on Taiwan.

I also want to note tech has been under pressure prior to this reasoning over the past week or so as there is/was a rotation of capital – where money flows out of one sector and in to another – from big tech into small cap and housing.

UNH and CAT are not small cap stock OR in the housing sector, but it is an example of how money is flowing out of large tech and finding new places to work. Whether you want to trade bullish those sectors now seeing short-term strength OR swivel and trade the large tech in a bearish fashion this software will help you scan for option trading opportunities whichever way you choose.

Markets in Focus: SPDR Dow Jones Industrial Average ETF – DIA aka the “Diamonds”

If you want to see a picture example of the move out of tech and it rotating into other non-tech areas look at the DIAmonds.

The DIA is an Exchange Trade Fund (ETF) that tracks the Dow if you will. It’s goal is to mirror the price and yield performance of the Dow Jones Industrial Average (DJIA).

There are a few large tech companies in the Dow-30 like Apple, Inc., Amazon.com., Inc and Microsoft and yes they are or have sold off a bit recently, but remember UnitedHealth Group, Incorporated and Caterpillar, Inc. are also in the index and those are far outpacing the tech stocks just mentioned and leading the Dow-30 higher over these past 6 days.

The choice is to trade this momentum or wait for a pull back OR look at the tech stocks and if you feel they are on sale and at an attractive price ask your broker if you want to find a spot to get in.

Tools and Observations

Education on Put Credit Spreads – Getting Paid to Let Time Expire

Here is a strategy that gives the opportunity to profit just for letting time go by until options expiration all the while anticipating the stock doesn’t really move.

It is the Put Credit Spread.

A Put Credit spread is comprised of two options orders on the same ‘order ticket’.

The goal is to sell the option spread at a price and ROI I like and anticipate the stock staying above the sold strike Put of the spread.

Max profit on the trade happens when the security in a Put Credit Spread stays above both strikes in the spread.  The options expire worthless and my account realizes the premium / credit I sold it for… in other words the goal is to keep 100% of the credit.

This is how I teach setting up a Put Credit Spread

One Sells-To-Open an option with a strike price just under the deemed support price for the security.

Then one Buys-To-Open an option with a strike price just inder that on the same order ticket / at the same time.  The premium for the higher strike price Put should be a larger premium than the lower strike Put so when the order goes through their should be a positive amount of money in the account as a result or a ‘Net Credit’ amount in the account.  It has to stay there until the options are excersized, closed out or expire.

Ultimately one is ‘Selling’ a Put Credit Spread. Specify a limit price or ‘Net Credit’ amout you want (or one can just take whatever the market gives, but I like to try for  a limit order amount).

I like to do this with an expiration that is happening with a week or less to expiration.  This allows me to expect a potential prpofit on this trade in a short amount of time rather than a long call option that may need more toime for the security to work as needed for that type of trade to become profitable.

Less time to expiration, less time to wait for profits.

The thing is with this approach it will make a smaller amout of money than say a long call, but I am not in for a lengthy period of time.

My goal, because I set these up with a short time-frame expectancy (5 trading days or less) is I look for a credit or potential profit to the account equal to 1% a day.  If it is a 3-day trade I want to see the payoff be at least 3% ROI.

Everyone is left to their own devices.

If one wants to set up a Put Credit Spread for a logner time duration and the potential profit is to their liking for doing so, by all means don’t let me stand in your way.

My 3-Step Options Trading Process

1. Spot an Opportunity
2. Build an Acceptable Risk Option Trade
3. Manage that Trade

In setting up a Put credit spread I have to find a candidate or as I say the first step in my otion trading process is to #1 – Spot an Opportunity.

I do that a number of ways and by looking over a number of scans.

One such scan is a MACD Scan.

I am looking for securities or a security with a fresh cross above the MACD zero or ‘0’ line indicating their may be some positive upward price move coming in the security.

I go to Stocks > Stock Rankers > MACD

And end up on this page:

I click on the ‘Stock List’ and choose the list I want.  I have the S&P 100 Optionable in the image above.

I leave the black dot in the circle for the Wizard (or Scan) ‘MACD bullish cross above signal line’.

I then click Search.

I then get a list of securities with those parameters met.  If none qualify the message on the page will read, ‘No Stocks Found’ and I move on to the next scan.

If there are some that meet the specs it will look like this:

ABT is a candidate I want to use for this case study education (highlighted in yellow  because I click on the line item for it).

I left-click on the chart hyperlink for ticker symbol ABT for Abbot Laboratories

I notice a support price of $101,  This is where the price has been supported from giong lower the last two times it touched that price area.

I anticipate ABT staying above that $101 price for the purposed of a Put Credit Spread.

I then move on to my otpion chains to work on the second step in my options trading process which is #2 – Build an Acceptable Risk Option Trade.

Remember I look to Sell-To-Open the strike price Put under my deemed support price for the security.

That is the $101 strike price.

I am also looking at options that expire this Friday, only three trading days out.

Since I am looking at a 3-day Put Credit Spread option trade I am looking for at least a 3% ROI to meet my average per day ROI goal of 1% a day.

Since I am looking at selling to open the $101 strike Put, I go look at the $100 Put strike to Buy-To-Open and run the numbers.

This will not happen all the time.

The ROI potential tends to come in at the 1% per day range, but this one is shwoing a profit potential to the tune of 16.28% or a 5.4% per day ROI.

Step #3 Manage the Trade

If one sells to open the $101 strike Put at $0.63 and buys to open the $100 strike Put at $0.49 that should make the credit $0.14 or $14 per conrtract.

The risk in the trade is the difference in the strikes less the credit.

This is a 1-poin wide spread.  If one gets put to stock at $101 that means they bought for $101 and they can exercise their purchased right to sell at $100 resulting in a $1 per share loss.  Offset that by the credit of $0.14 and their max loss potential is $0.86 or $86 per contract.

Sohuld however, ABT stay above the sold strike in the Put Credit Spread or $101 the markets aren’t likely to ‘put’ the security to the account at the lower $101 price.

This should see the option expiring.  Since that one expired there is no need to exercise the $100 stirke and that expires also.

The result is the $0.14 or $14 per contract is realized and one can say they made a 16.28% ROI on the trade.

Continue to run your scans for Step #1.  Spot an opportunity where a security has an established support price. Step #2 look at the options chains to see if there is a Put Credit Spread scenario with a % ROI potential you like and #3, if you like it and place the trade manage it the best you can.

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