A New Strategy, a New Tool, and Three New Recommendations
TradeSmith is always looking to improve its operations, and its proprietary trading algorithm, Predictive Alpha (or "An-E," short for analytical engine) that we use here is no different.
Today, we want to introduce you to two new features you can expect to see regularly as a valued member of Predictive Alpha Options...
Buying calls and puts...
And the Predictive Alpha Options Zones tool.
Plus, based on both of these features, we're recommending three new trades today as well, which you can find below in this alert.
Let's start with our new strategy...
Buying Calls and Puts
When we buy options, we anticipate the stock is going to make a move in a specific direction, not just stay above/below a certain price.
Buying a call means you think the price of a stock will go up (or display bullish behavior). For every dollar the underlying stock moves above the strike price by the option's expiration date, the call we bought will be worth one dollar.
Buying a put means you think the price of a stock will go down (or display bearish behavior). For every dollar the underlying stock moves below the strike price by the option's expiration date, the put we bought will be worth one dollar.
Said simply, an increase in the value of the stock while you own a call option will benefit the value of the call option, and a decrease in the value of the stock will benefit the value of the put option.
Now, one of the great things about buying options is that your potential upside is limitless – the option could, theoretically, keep climbing in value until expiration as long as the stock keeps moving in the desired direction pretty quickly.
On the flip side, however, you could stand to lose a lot of money if the stock does not go the way you want... but you can only lose as much as you paid.
If you purchased a single call option for $0.60 per share, you would realistically only be able to lose the $60.00 – yes, that's sixty dollars – you paid for it.
Every option, whether it is a call or a put, is a contract that controls 100 shares of the underlying stock. So, if an option is trading for $1.50 per share, you would pay $150 for it. Or if an option is trading for $15.00 per share, you would pay $1,500... and so forth.
You aren't limited to the number of contracts you can buy, and we'll never recommend a number of contracts since everyone's capital amount is different, so you must remember: Never invest more money in a trade than you can afford to lose.
Our new Predictive Alpha Options Zones tool helps you identify option strategies that have a high likelihood of being successful based on current market conditions.
The tool runs from left to right on the X-axis, just like a stock chart, and is divided into six zones along the Y-axis. The six zones are reproduced and expanded on top of the chart, with recommended strategies from buying calls or selling puts to more complex ones like buying protective puts, putting on straddles, and more.
This exciting new tool is at your disposal as well; by logging into TradeSmith Finance, you can scroll down to the Predictive Alpha widget and search nearly any ticker to find its zone and An-E-recommended strategies.
As always, you can reach out to your Customer Concierge Team at 866-385-2076 or support@tradesmith.com for general questions, or JohnandWade@tradesmith.com for service-specific questions Monday through Friday, 9:00 a.m. to 5:00 p.m. ET.
Now, here are your three new trades...
Trade No. 1: Buy Adobe Calls
After an initial scare earlier this month that OpenAI was moving in on Adobe Inc. (ADBE)'s turf, investors have since reconsidered and think the shares are undervalued.
The future of A.I.-assisted content creation may be controversial right now, but if we had to make a bet about who will come out on top, it would have to be Adobe, the King of Content Mountain, Adobe – and its dominant Creative Suite of applications.
Integration of A.I. into a toolset that is already familiar to content creators, designers, and artists should keep Adobe's products in the #1 position as the industry matures.
Right now, ADBE is currently in Zone 3 with a score of 49, meaning that An-E believes the ideal options strategies for this stock include buying/writing covered calls, selling puts, selling straddles, or putting on bull spreads.
But because An-E thinks this stock is heading 3% higher over the next 30 days, this should be interesting for call-option buyers. So, we're going to take a slightly different approach than what the algorithm currently recommends.
For example, in a realistic scenario, if an investor bought the Mar. 28, 2024 $590 Calls for $19.50 per share and the stock increased by 3% over the next 10 days, the calls will be worth $23.40 per share for a 20% gain. That's almost seven times better than just buying the stock.
Buy to open the ABDE Mar. 28, 2024 $590 Calls (ADBE240328C00590000) for a maximum price of $21.00, Good Till Canceled.
Trade No. 2: Buy Realty Income Puts
Realty Income Corp. (O) was a real favorite among investors looking for a real-estate investment trust (REIT) with a steady income stream from commercial property.
However, the economics that made this business so interesting before this year have reversed. Commercial real estate is in decline with rising defaults and unoccupied space driving down rent.
REITs are special entities and must return most of their profits to their shareholders in the form of ordinary dividends. Because the dividends are so large, the shares are valued much like a bond.
When interest rates rise, bond prices fall, and stocks that act like bonds follow them down. Interest rates spiked earlier this month, and O dropped fast. The shares have since recovered a little to the point where the price is at resistance.
Right now, O is currently in Zone 2 with a score of 31, meaning that An-E believes the ideal options strategies for this stock include buying/writing covered calls, selling puts, or putting on bull spreads.
But because An-E has a bearish forecast on the stock of -7%, prices are likely to fall below $50 per share in the short term. We like to be careful about recommending long puts, but because the outlook is so negative and the puts are so cheap, this is a trade with more than enough potential upside to justify the risk. So, we're going to slightly adjust our approach to this trade compared to An-E's current zone reading.
For example, if an investor bought the Mar. 15, 2024 $50 Puts for $0.20 per share, and the stock dropped to $48 over the next two weeks, the puts would be worth a minimum of $2.00 per share for a 10X return.
Buy to open the O Mar. 15, 2024 $50 Puts (O240315P00050000) for a maximum price of $0.30, Good Till Canceled.
Trade No. 3: Sell NVIDIA Puts
NVIDIA Corp. (NVDA) set off a buying frenzy in the market after releasing earnings last week.
Demand for NVDA's A.I. chips from customers like Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and Meta Platforms Inc. (META) is so far above expectations that the CEO said they have had to come up with new ideas to distribute the available supply "fairly."
That's a nice problem to have right now, and it helps explain why investors sent the stock to an all-time high.
Right now, NVDA is currently in Zone 6 with a score of 100, meaning that An-E believes the ideal options strategies for this stock include overwriting covered calls, buying protective puts, or buying puts.
NVDA stock is overbought, which is understandable right now and why it's been placed in Zone 6. But An-E has identified additional upside in NVDA over the next 30 days, which could be interesting for call buyers, but we recommend a different bullish strategy of selling puts.
The option premium (price) of NVDA's calls and puts is extremely inflated, so much so that it's hard to imagine how an investor would make money with a long call position before the excess value melts away.
However, inflated premiums are great for option sellers, which is why the right approach is to sell puts well below support. We know that some investors get a little nervous about bullish strategies in stocks near all-time highs, but selling puts at the $750 strike will allow you to keep the premium paid even if the stock remains flat – or even falls a little.
The maximum profit will be achieved as long as NVDA is above the put strike price at expiration.
Sell to open the NVDA Mar. 28, 2024 $750 Puts (NVDA240328P00750000) for a minimum price of $17.75, Good Till Canceled.
Charging Forward with A.I. On Our Side
Timing is everything when it comes to these trades, so head to your app store now, download the free TradeSmith app, and enable push notifications… because the next great trade is right around the corner!
To view the entire Predictive Alpha Options portfolio, please click here.
Sincerely,
John Jagerson & Wade Hansen Analysts, Predictive Alpha Options
P.S. For any questions or concerns, check out your brand-new Frequently Asked Questions page, which you can access here. Otherwise, reach out to or contact your Customer Concierge Team at 866-385-2076 or JohnandWade@tradesmith.com Monday through Friday, 9:00 a.m. to 5:00 p.m. ET. Our dedicated team will be glad to assist you.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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