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Put sale in VMW

Made some great trades today (IYR short, APA long, AGU long) and some not so good trades (FSLR pre-earnings condor) but still made out like a bandit today. Here's my one good trade for tomorrow. If you guys are nice I might post another one in the later hours.

Ok, I've been harping on this trade in VMW and it still looks good.

VMW Daily Chart

VMW Daily Chart

So from an intermediate timefram we had a really nice channel breakout, then earnings came out and sent the stock gapping lower. We have now pulled back to the channel breakout area, with a lot of moving averages around the price. So my techincal thesis is that support will hold from previous resistance and the 50 day moving average will act as nice support as well.

Now we do have a lot of consolidation around this area and we are still farily weak in the name. So that's why I suggest selling puts; we're expecting that the stock won't move down as fast as the implied move thinks it will. Anyways here's the play:

Sell VMW 25 Puts at .70 or better

Since it is getting closer to expiration, the time decay will increase (I suggested this play at .90 as well).

VMW Risk Profile

VMW Risk Profile

So the options are giving you about a 70% odds of succes... not bad. You're also looking at about a 3% return on your basis in a couple weeks, or 6% if you're running on margin.

Now if my techincal thesis is broken in the name, then I'll cut my losses or roll to a different position (June 25s possibly). So if we break below the 50 day moving average or 25 then it would be prudent to cut your loss. Notice that with the current option curve, you're risking 40 to get 70. Not that great on its own, but remember that there is always a tradeoff between your risk/reward and the implied probability of success (I'll be adding that into options bootcamp this weekend during the upgrade).

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/