Michael Lamothe from Chart Your Trade recently posted a chart that caught my eye. The stock is Lumentum Holdings Inc (NASDAQ:LITE) and to be honest, I’ve never looked at it before, but the chart really grabbed my attention.
I’ll preface this by saying that I haven’t followed the company, so I don’t know much about them, but the chart looks very interesting.
We can see plenty of buying pressure on the recent breakout and decent accumulation on the recent selloff. There has been low volume as the stock pulled back to the support level in the last two days.
Prior resistance could act as further support going forward and it’s easy to create a nice risk/reward trade if you keep a tight stop as Michael suggests.
It’s a high volatility stock, and that means that it is likely to experience big swings in price. The other thing high volatility means is juicy option premiums!
Implied volatility is currently around 46% which is in the middle of the 12 month range. Compare that to a stock like Apple Inc. (NASDAQ:AAPL) which has implied volatility of 15%.
Traders thinking Lumentum Holdings Inc (NASDAQ:LITE) will stay above support can earn a nice return by trading a cash secured put at the $45 level.
The April $45 put was trading around $2.67 at the close of trading on Tuesday. With the stock price at $45.55, that represents a 5.93% return in 43 days or 50.36% annualized.
If the stock finishes below $45 at expiry, put sellers would be required to take ownership at $45 with a net price of $42.33 thanks to the option premium received for selling the put.
There is a 7% margin for error with the breakeven on the trade being $42.33.
This trade could be worth a shot if you like Michael’s analysis.
The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not experienced in options trading or familiar with exchange traded options. Any readers interested in this strategy should do their own research.
Disclosure: I have no positions in LITE.
About the author: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.