Which bullish strategy can I use for this view?

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PeanutButter108

Hey everyone!

I've been looking at futures for the past few years, and I'm trying to learn more about the options world as it seems really interesting. I do have one question and I'd greatly appreciate it if y'all can help me out. :)

MY VIEW:
So let's say we got a stock that's trading at $20. I'm expecting this stock to reach $30 and can go higher than that, but also believe that it won't go below $10. Here we can say that I have a bullish view on this security. While I don't believe that the stock will go below $10, I do think that there is a chance that prices could get close to that level while ultimately heading towards $30 or higher.

I have provided a picture below:

upload_2018-2-3_10-3-32.png


STRATEGY?
Based on the view I presented above, which strategy can I use to play this?

Thank you so much, and I really am grateful for any insights!

Much love,

PB
 
There's insufficient information given to believe that stock is imminently going to move from 20 to 30 (or from 20 to 10). So no strategy I can think of has a better than 50% chance of success on this one right now. A 50% probability of a 50% gain or a 50% loss to me sounds like a coin toss.

However, if you want to own this stock say for dividend income, and this fits with your fundamental analysis and your long-term investment plans, just go ahead and buy it, the sooner the better.
 
As tomorton said, you presented insufficient information. What's the time frame for the move? How much are you willing to risk? Do you want to nibble at a lower R/R or go for broke for the big move? Are you willing to own the stock? Do you have the wherewithal to own it?

There are many approaches and the best one is based on size of the move and the time frame - which unfortunately isn't known in advance. So the best you can do is select a strategy with an acceptable R/R.
 
PeanutButter108 said:
Hey everyone!

I've been looking at futures for the past few years, and I'm trying to learn more about the options world as it seems really interesting. I do have one question and I'd greatly appreciate it if y'all can help me out. :)

MY VIEW:
So let's say we got a stock that's trading at $20. I'm expecting this stock to reach $30 and can go higher than that, but also believe that it won't go below $10. Here we can say that I have a bullish view on this security. While I don't believe that the stock will go below $10, I do think that there is a chance that prices could get close to that level while ultimately heading towards $30 or higher.

STRATEGY?
Based on the view I presented above, which strategy can I use to play this?

Thank you so much, and I really am grateful for any insights!

Much love,

PB
More...

I don't trade options, but, as this is about a stock, I'll take it on.

I assume you have no robust trading strategy. Otherwise you'd know that what you expect and what you believe, much less whether or not you're bullish, are unimportant. As to what strategy you can employ, there are dozens, and each one of them will likely give you some sort of signal. Not that all the strategies you look at will give you the same signal, but that's generally what happens the farther away one gets from focusing on price (if you are unfamiliar with this approach and are interested, see this link).

If, for example, you were trading a strategy based on what's become known as "price action", you'd know that you had, up until the last downmove, an uptrend. Doesn't matter if it's a monthly chart or a weekly chart or a daily or hourly or 5s: if your timeframe is bound by what you've shown, then all you need to know for now is that you had an uptrend and now you don't and you'd be out and waiting either to short or re-enter a long. And what you'd be waiting for is to see whether or not price reverses at the last swing low, as this is where enough buyers stepped in at the time to reverse price and motivate a continuation. If it does, you'd be back in with a stop below that swing low. If it doesn't, you'd wait to see if price reverses at the swing low before that, which appears to have spent a little more time at that level and is likely more important to both buyers and sellers. Another option (no pun intended), if price instead reverses out here in the middle of nowhere, above that last swing low, is to wait and see if it reaches the last swing high, where buyers backed off from paying the ask, and you would of course have tactics detailed that would tell you whether to trade a reversal, trade a breakout (in case they've changed their minds or there are new kids on the block), or trade a retracement after a breakout (for all those who missed the breakout but want in on this), whichever occurs. If you don't have a robust trading plan that addresses all this, then whatever you'd do would be a gamble. But there's more than sufficient information presented in the chart for you to reach a decision. And I pretty much live on peanut butter.
 
You could trade an option spread (forgot the exact term) but basically buy a call and finance that by selling a put. Where you buy and sell your strikes is up to your strategy. I would assume you'd be selling a put at $10 if you didn't think it would trade below that level. As for upside, you could buy the $30 call but if held to expiry would only make money once above $30.

NB: Always buy the call first due to margin
 
The strategy spread'em refers to is called a collar - it basically covers you for the downside at the cost of giving up the upside over 30$. As others have stated the timing of your strategy is rather important, if your view is for the next week it requires a different approach then if it is over a month, several months or even longer.

Given that what you basically predict is a range you could consider selling an Iron condor. Doing this on a 20$ stock isnt that worthwhile unless its very volatile but the principle would work as that strategy yields a return for a range-bound stock:

OS 1 C JUN18 30
OB 1 C JUN18 35
OS 1 P JUN18 10
OB 1 P JUN18 5

This will give you a credit without knowing more on the stock its impossible to say how much. As a rule of thumb dont do it unless the credit >1$ for each of the two spreads.

Another option - no pun intended - is to do structured call writing. Basically you sell puts until you get assigned and then you sell calls on the stock. A fairly standard example given in literature would be:

100 Shares XYZ
OS 1 C MAR18 30
OS 1 P MAR18 10

By March 18 there are three possibilities:

1) Stock is between 10 and 20$ - you do the same trick again for April;
2) Stock is under $10 - you get assigned on the put and subsequently do OS 2 C APR 18 20
3) Stock is over @30 and you get assigned on the call - you OS 1 P APR18 30

And repeat over and over, because you predict a range-bound stock this should be more worthwhile than simply holding the stock.

There are much more aggressive strategies:

OB 1 C MAR18 20
OS 3 C MAR18 30
OS 3 P MAR18 10

This may be possible to do for a credit - it all depends - in any case you finance your long position with shorts at the edges of your range. Obviously if the stock goes below 10 or over 30 things will move fast against you. Variations are possible on all of this.
 
If my conviction about the movement is strong, this is what I would do:

Buy a $20 straddle with expiration that roughly matches the time frame of my estimate of when this would happen.
 
Buy one third now, buy one third on 15 and buy one third at 11. Sell everything on 9. Keep all positions untill uptrend is done. (upside down picture you use for identify bull market?)
Make sure you can afford maximum loss. Wash and repeat when you see another patern you like. Et viola, you have a trading system that will have a positive expectancy.
 
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