Sharp BETS Trade of the Week: JWN

This week’s trade:  We buy the JWN Jan 2021 30-40-50 call fly, paying .80 (.85 top)

We have officially entered a new phase in the markets.  I am officially announcing the end of ‘Peak Fear’ as I said on Mad Money yesterday. 

But what does that mean? Does peak fear being over mean we are out of ‘Zone 4’ in the VIX.  

No, it does not.  But it does mean that minus any new information we are probably not going to see 80 VIX again.  However, that does not mean we are due for 20 next week. It is going to be a nice long while before we break 20 in the VIX.  Could be weeks, more likely months before the VIX even SNIFFS at a sub 20. The 30’s are likely to be hard for the time being.  

I would expect us to see more of what we saw the last few days, like Monday and Tuesday, where in two days we are up over 250 points at the top and then in no time…we give it away.

The market is going to be choppy, and sloppy.  Meaning we will have periods where in a short time we sell off 200 S&P points.  As these periods are coming to an end, VIX will tank.

We will also have periods like this when we are rallying and the VIX is super firm.  The last 5 days seem to sum up what I think trading could be like for the next few weeks

Notice VIX was down last week, WITH THE MARKET.  And now it is UP this week, WITH THE MARKET. This is a sign of confusion, not panic.

The market is no longer fearing the whole world falling apart.   BUT, it does not mean the market thinks all is well. 

VIX futures tend to agree where we can see VIX is CLEARLY still in backwardation:

With the curve in a steep backwardation it is hard to imagine a sustained rally for any time in the near future.  Not until we get an ‘end date.’ Once we have that, VIX futures might recede and the S&P 500 might start a real rally.

I will say that currently the best leading indicator has been realized volatility.  When we have had roaring up days, that has signaled the END of rallies. Likewise, when the sell offs have been muted, that has signaled a turn around.

Here is the thing though, muted, currently means a move of less than 2.5%.  As a VIX of 46.7, implies 3% daily moves for the next month.

As it stands now, realized volatility is falling.  It needs to last for us to gain any bull traction.

This would mean that 20 day HV dips back below 60 day.  Would be even better to see it dip below the VIX index.   We are a ways away from that, although it is nice to see 10 day HV truly backing off.  

Option Pit Traffic Light:

SPX:  Yellow

SPX IV:  Yellow

VIX:  Yellow

VVIX:  Red

VXX:  Green

The retail space has definitely changed over the last few weeks.  Some big names are going to go the way of the dodo bird. Here are some names that I think are NOT going to make it in the retail space:  GME, M, JCP (for sure), parts of GPS, parts of LB, and this is probably the nail in the coffin of Forever 21 if they WERE going to make a comeback.

The names that are going to survive are TJX, BBY, KSS,RVLV, and the big box stores.  This was probably a plus for HD and LOW as well. The amount of people I see stuck at home doing yard work has been astounding.

I want to focus on JWN in particular because they have something the other retailers do not:  an AMAZING online experience and a true digital footprint. One of the pluses and minuses of a closely held stock run by family is that they are willing to think more long term.  JWN has been doing that with its online business.  

In my wife’s case, while M is delaying payments to partners, JWN is actually out working with bloggers to promote items to sell.  Lauren had a sponsored post just last week.

The stock has been hammered.  Andrew and I thought it was the steal of the year when it got down to 15, at 19 bucks a share, it is still cheap.

While 45 might take a lot of time, I think the stock has a legitimate shot at 30 bucks a share by the end of the summer.  It could even make a run near 40 if the US economy picks up. I personally believe that the upper and upper middle classes are sitting on a LOT of forced savings and have pent up demand.

Looking at the IV, there is NO WAY to simply buy a call in JWN.  The option premium is simply too high that is why we are doing a Call Fly.

While IV is off, it is still way over 100.  That is pretty darn impressive. I think we want to be net short at that level.  

I want plenty of time for this trade to work, which is why I am going out to Jan.  An additional benefit is how cheap the fly becomes. The pay out is about 12.5 to 1, which is great.

We buy the JWN Jan 2021 30-40-50 call fly, paying .80 (.85 top)

If the underlying tanks I will probably cover the 40 calls, but for the most part, I think this is one I will be sitting in for a long period of time

My target is for the 1st sale to be better than $1.50,  hopefully my last will be over $5.00.

Your Only Option,


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