Legging into a Spread - Zoom
Zoom Video Communication (ZM) is one of the most controversial stock today. Looking at analysis for this company you can find both very bearish (Astronomical Value/Impossible Valuation) and also very bullish arguments (Potential to change business on global scale/the next Tesla).
While I tend to agree with the short side, I try as a trader to find the point where the exponential move is exhausted, and then try to go short but with a hard stop, knowing that many short sellers are already being killed here and that it can go a long way up until it will break down again.
Today as I looked at the hourly chart I saw that ZM lost momentum and entered fall after being in the summer from 420 to 520, in the last days.
I could short 100 shares at 520$ (52K$) ,but then my risk was unlimited and I could be stopped out real quickly. Also the margin requirements will be at least 50% and according to a notice I got from my broker yesterday, it will go up for all traders to 67.5% before the US election (implemented gradually from Sep 28th to Oct 23rd).
So I figured it's better to buy puts, both from the risk prospective and the margin requirements.
Put 520 cost 4K and is like selling 100 shares of ZM at 520 (BE at 480 because it costs 40$).
The implied volatility of this option is 76.5%, meaning it is very expensive (I need about 8% move down in the following 3 weeks just to break even).
So, the solution is to do a bear spread, which means I will sell also Put480, thus limiting my profit potential, but also reducing the cost and the Theta and Vega exposures.
I could buy the spread for 1800$ (4000-2200), which will give me 1.2 R:R ratio (paying 1800 and maximum payback 4000) which is not so appealing.
Or do a call bear spread by selling call 520 and buying call 560 (getting primum of 1600$ but risking paying back 4000$) which also not so appealing.
The way to improve the R:R is to use the core &turbo technique. By day-trading ZM and legging into the spread I could improve my swing R:R ratio.
So, I bought the first put on the double top, as price rejected crossing the RL270 and the BB mean and was in the winter, and sold the other put at the end of the session.
That way I only paid 1130$ for the spread that can pay me up to 4000$ at expiration if ZM will be under 480. Now my R:R was 2.5:1 (2870 / 1130) which make sense for this swing position.
If you know how to time your entries by using day-trading techniques, you can leg into an options swing position and improve your R:R and reduce your risk.