Posted April 20, 2020
By Alan Knuckman
When the Markets Crashed, I Smiled
The markets roaring back to life
Stocks continued to recover off their virus lows last week while the S&P 500 successfully attacked the all-important 2,800 level. Momentum is back on our side for now!
I know theres tons of news swirling around out there about a potential end to the coronavirus shutdowns and possible treatments. But you know the drill: dont get caught up in the hysteria just trade what you see.
Just last month, we endured an extreme meltdown move in the markets. But believe it or not, I was actually encouraged by how quickly the market tanked. Remember, the averages took a beating in March, dropping 35% from their all-time highs in a matter of weeks. They were also quick to stage a serious recovery, snatching back 50% of those losses just a few weeks later:
Its safe to say volatility has been our friend lately another reason our options strategy is winning.
If you own a stock position, its next to impossible to maintain your conviction when the market is making moves like weve witnessed so far this year. But I sleep easy because of the defined risk of my options plays. I can focus long-term and options give me the staying power to ride through the volatility.
Of course, a modest move in the underlying stock can lead to big gains in our options plays. So even a 4-5% move in the stock can lead to a gain of 50% in the option. And 8-10% move in the underlying stock (which it is getting fairly common in these volatile times), can lead to a quick double for our positions.
Its all about putting probability on our side!
Keep it In the Money,
Alan KnuckmanEditor, In-The-Money
Chart of the Day: WORK-ing on a Breakout
We were treated to a nice little pop on Friday after Gilead announced positive news regarding COVID treatment Remdesivir. From what I understand, the sample size was small, yet the results are promising.
Of course, the numbers dont matter much in this headline-driven environment. The market was looking for any shred of positive news to jump on and the herd bought stocks with both hands Friday morning.
Another side effect of the news-driven bump is that some of stocks hardest hit by the virus enjoyed the strongest recoveries, while a lot of the stay-at-home plays that have outperformed recently took a hit.
We just talked about two red-hot stay-at-home stocks Friday morning: Netflix Inc. (NASDAQ:NFLX) and Peloton Interactive Inc. (NASDAQ:PTON). Both stocks retreated about 5% to finish the trading week. Thats normal action especially when you consider how strong these names have been since the market bottomed last month.
Is the stay-at-home stock revolution over? I dont think so. One day does not at trend make. After all, the market gods have to keep us honest
While some of the more overbought stay-at-home names retreated on Friday, one of these stocks is setting up for a potentially powerful breakout. Check out this chart of Slack Technologies Inc. (NYSE:WORK):
WORK is a relatively new stock that has experienced some serious volatility so far this year. The stock had been stuck in a nasty downtrend since its IPO last summer, dropping as much as 60% from its June highs.
But the stock has started to perk up again following its brief drop into the teens back in mid-March. Shares are now approaching a huge breakout zone at $30. If WORK can convincingly break this level, its off to the races
-- Greg Guenthner