Betting Big on More Choppy Waters

Hey Traders,

Before we get into the trenches today (or rather, the pit!) I wanted to make sure you’re coming to my free event tonight at 8 p.m. EST, where I’ll be covering my top three post-pandemic stock picks.

These are three of the names I expect to see moving over the next week… And not necessarily in the way you might think!

Plus, I’ll be sharing some key information that will help you on your journey to becoming a better, more confident trader.

Trust me, you won’t want to miss this! Click here to sign up and reserve your spot.

Now that that’s out of the way, can I just say…

I hope you’re having a better week than tech stocks!

Some of the biggest names in the tech market have been taking it on the chin over the last few days…

I mean, just look at Tesla (Ticker: TSLA). Even after Elon’s breakout SNL appearance this weekend, the EV stock is having a tough go at it, to say the least.

And one “innovation stock” ETF is certainly feeling the squeeze this week.

And one options player in particular is betting on more downside ahead.

ARK Staying Afloat?

ARK Innovation ETF (Ticker: ARKK) touts itself as investing primarily in stocks that fit with its credo of “disruptive innovation.”

For example, currently, some of the fund’s top top holdings are aforementioned EV maker TSLA, virtual healthcare stock Teladoc Health (Ticker: TDOC), streaming hardware maker Roku (Ticker: ROKU), and new crypto exchange platform Coinbase (Ticker: COIN).

Even with ARKK down more than 30% since its mid-February peak of $159.70, it seems that options sentiment is somewhat divided, with heavy put-buying and put-selling at a few specific strikes.

ARKK Daily with RSI — Chart courtesy of StockCharts

One notable play in particular caught my eye this week: a bear put spread opened on the June contract at the 94.96-strike and 85-strike.

By buying to open at the 94.96 strike, this trader is banking on the ETF falling below that price level before options expiration on June 18. 

In addition, by selling to open June 85-strike puts, this seller is telling us that while they are betting on some downside … they don’t think there will be too much dropoff (since they are signalling they think ARKK will stay above the $85 mark, allowing them to reap maximum profits from their put play).

Opening a bear put spread presents some distinct advantages over simply buying puts outright. For one, selling puts can help offset the costs of purchasing puts, lowering the initial capital outlay that is required to execute a trade (and by extension, also lowering the maximum loss). 

So instead of forking over $3,550,000 to open their bearish bet, this trader was able to limit their initial cost to “only” $1,880,000. A bargain, right?

The downside is that the trader has also limited their potential gains by selling at the lower strike-price. If ARKK falls below the 85-strike, this trader will start seeing their profit margin being slowly chipped away.

Pairing Up to Pile on ARKK

That’s not the only interesting options action ARKK is seeing. Specifically, there’s plenty of put buyers targeting the May and June $90- and $95-strike contracts. It seems like some traders expect this level to act as a near-term floor for the Cathie Woods-helmed ETF.

On the flip side, put sellers have also been more than happy to pile on in the opposite direction. I’ve been watching (and participating in!) some notable selling action at the May 95-strike, which indicates there’s plenty of traders who think ARKK will be able to hold above that level through the end of the week.

However, it looks like many of these traders aren’t overly confident in their optimism. It looks like many of them may be hedging their bets by buying puts at the $90-, $85- and $80-strikes.

These put credit spreads will help them limit any potential losses if ARKK does fall off a cliff — but at the cost of also reducing their potential profit margins.

I’ll be keeping a close eye on ARKK’s key levels in the weeks to come, especially with May expiration just days away.

Finally … remember to sign up here to join me tonight at 8 EST for my top-three post-pandemic stock picks!

Your Only Option,

Mark Sebastian 

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