Published May 19th 2022

Daily Brief - How to buy the dip safely

TLDR

Stocks can rally even during bear markets. If you believe markets are heading for a technical rebound, then there is an option structure that allows you to cut down your risk in half: the risk-reversal.

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SPX Price, click to open in TOGGLE

Why and how to go LONG?

You know the drill - PMIs and growth are still showing strong, valuations have normalized and the Fed is treading cautiously.

It’s understandable if you are thinking about buying the dip to play for a rebound. Unfortunately, with VIX at 25 it’s really hard to come by cheap call options.

Except…

With high skew, it’s Risk Reversal season! How would you like to halve your downside whilst maintaining all the exposure to the upside?

Selling a June OTM Put buys you 2x OTM Calls if you use 7% out of the money strikes. So as of yesterday’s close that would be +2x June 4360C and -1x 4080P.

That will give you a solid exposure to a rebound, whilst cutting your downside in half.

option strategy may 18 2022

Conclusion

VIX at 25 offers compelling opportunities to play both the upside and the downside. Leaning on opportunities offered by the high skew, investors can gain compelling exposure to both views.

Anything mentioned above can be applied to most stocks with liquid options, as well as to crypto and bonds - with the added benefit that the for crypto skew goes both ways, so it’s easy to do call spread too.

Don’t listen to the naysayers, option investing is more fun when vols are high!

Your input please!

We know the readership of this hallowed publication counts very experienced options traders - you know who you are.

We released our Bullish Option Strategies and Bearish Option Strategies guides, and we’d love your comments!

Idea Spotlight: MGM Resorts

Valuation indicators for MGM Resorts rose and historically, this led to a median increase in price of 5.78% over the following 1M. TOGGLE analyzed 5 similar occasions in the past to produce the median projection and this insight received 5 out of 8 stars in our quality assessment.

The Cosmopolitan of Las Vegas officially became an MGM Resorts International property Tuesday after the company closed its $1.625 billion deal with the Blackstone Group.

mgm price action may 2022

Daily Brief - How to buy the dip safely

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