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Today we’re talking about support and resistance — not only in stocks but also in our relationships.
Those of us who are parents know it is hands down the Most Difficult Job in the World.
I waited until I was a bit older to have my son and used to think that all those housewives of the guys I worked with in the pit had it made lounging at home all day. (Not that it was something I wanted to do; I loved my job!)
Boy, was I wrong!!
Parenting is hard enough … but parenting a teenager!!??
My mom always tells me, “The older you were, the more difficult you were.”
But being the mom of a teenager in 2020!!??
OH MY GOODNESS!!
The thing is, you are constantly questioning yourself during “normal” times.
Am I doing the right thing? Should I be doing it like this? How bad is it that I yelled at him? Am I explaining things properly? How do I teach him to be a “good person” and an asset to society?
ETC., ETC., ETC. …
On top of the regular questioning of our parenting skills, we know how difficult this pandemic has been on our kids.
My son has not physically been in school since March!!!
And I think I have it bad?
So, as much as they may resist at times, we need to support them.
Now, looking at resistance and support on stocks charts on the other hand … definitely easier!
Below is a chart showing Home Depot (HD):
The lower red line indicates support on the downside and the upper red line represents resistance on the upside.
HD has been trading in this range of $260-$293 since late July. Can it trade out of this range? Absolutely!
But I’m thinking it is once again going to bounce off this support level.
Why? Take a look at what else we have:
Do you see it?
I’m talking about the last (that’s today’s) candlestick. It’s a doji. And remember that a doji can signal a change in trend …
HD has been trending down since last Tuesday.
HOWEVER, instead of buying calls to take advantage of HD bouncing and trading higher here, I would like to sell a put spread.
By selling a put spread, we can take advantage of holiday decay. With Hanukkah, Christmas and New Year’s Day coming up, the markets usually slow and market makers (liquidity providers) start lowering the prices of their options.
I like the HD Jan15 puts because it’s the monthly expiration, so there should be more volume and tighter markets.
I like selling the 245 puts and, for margin, buying the 200 puts collecting $3.00.
Now you may be thinking: Wait! Those 200 puts have a much higher implied vol of 39 than the 245 puts implied vol of 27.39! Why this spread?
Well, the 200 puts implied volatility is higher because they are so far out of the money AND they are $.25.
KEY LESSON: Once an option is trading a quarter or lower, the implied vol doesn’t really mean much.
I would be out of this spread if HD closes below $260.
Now I need to take care of my own “home depot!”
Thanks for reading … See You Next Tuesday!
PS – By the way, inflation is poised to BLAST OFF next year unlike anything we’ve seen in decades — and on Thursday we’re revealing the most important trade since 1981 (when some of us were teens!). Grab a seat to find out what is live. REGISTER HERE
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