Why So Many Choices?

I get people asking me why I offer so many ideas on the same stock set up. Do I not have conviction? Am I just tossing up anything I can think of? Do I get paid by the word? Hitting a new high of 8 trade ideas on CarMax, $KMX, today it is time to explain to all. All of the trade ideas I offer are engineered from the technical set up combined with the historical record and the current market for the stock and options it. One analysis. From that I develop a strong conviction about one or possibly two trades based on either a directional bias or a mispricing of volatility that allow me to benefit in a big way if I am right and limit risk if I am wrong. If it were just me it would end there.

But I also have premium users that those trades may not work for, for one limitation or another. Some may be trading in an IRA and cannot do trades that take margin. Others may not have the experience to trade complex options combinations or the access to certain trades from their broker. Still others may have a different risk tolerance than me, more comfortable selling premium than buying options for example. All these perspectives come into play in creating the menu of trade ideas. As an example, below are the 8 ideas that I offered on CarMax today. The first thing to notice is that they are all bullish despite differing timeframes. From there, they have differences that I will outline under each trade.

Trade Idea 1: Buy the April 35 Calls for $1.20.
A simple bullish trade to participate in unlimited upside with exposure limited to the premium paid. Any level of options trader can take this trade.

Trade Idea 2: Buy the April 36/38 Call Spread for 55 cents.
Also bullish but with a lower cost so less capital at risk and still a 3.6:1 potential reward to risk, most options traders can take this trade.

Trade Idea 3: Buy the May 36 Calls for $1.10.
A simple bullish trade to participate in the upside with exposure limited to the premium paid with more time for it to play out than the first trade. Any level of options trader can take this trade.

Trade Idea 4: Sell the May 31 Puts for 50 cents.
A riskier trade in that it takes margin, but it also takes in premium and gives an opportunity to buy the stock at a discount if the level is breached. Margin accounts can do this trade and IRA’s that have cash on hand to cover the full price of buying the stock at 31.

Trade Idea 5: Buy the May 31/36 Bull Risk Reversal for $0.60.
A more sophisticated trade that gives the upside participation of Trade 3 but at a lower cost from the sold puts. Margin accounts can do this trade and IRA’s that have cash on hand to cover the full price of buying the stock at 31.

Trade Idea 6: Buy the April/May 36 Calendar Call Spread for 40 cents.
Also a more sophisticated trade that gives upside for a longer period of time and at a lower price, calling for a longer timeframe for the rise to occur.

Trade Idea 7: Buy the April/May 36 Calendar Call Spread selling the May 30 Puts for free.
Also a more sophisticated trade that gives upside for a longer period of time with leverage and using margin, calling for a longer timeframe for the rise to occur.

Trade Idea 8: Buy the April/May 36 Calendar Call Spread selling the May 31/29 Put Spreads for 10 cents.
Nearly identical to trade 7 but capping the downside risk and lowering the margin usage, allowing IRA’s to participate in it more easily.

As I trade I let all know which trade I took, but let each user decide for themselves based on their own criteria. Some just follow my trades other create other derivations. I took the last trade and was considering both Calendars before I did. In the end the only question for me was if I was comfortable with unlimited downside exposure at 30 or capped at $2 from 31. As the cost for the cap shrank I chose to pay for it.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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