This One Trade Starts Our Mentor-Mentee Relationship

Here’s a trade that you might enjoy keeping an eye on for the next 33 days.

This trade is in Vermilion Energy, ticker symbol VET.

Before sharing this idea with Digest Subscribers, I believe it is best to explain how I came across VET, and the criteria met.

Note to Wiretapper Options Members – this idea (along with three new ideas) will be discussed further in our Monday Trade Session, along with a follow-up Q&A in the Discord options channel.

Let’s get started.

Are you familiar with the term ‘beta’?

Beta (β) is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500. 

Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used for pricing risky securities and generating estimates of assets' expected returns, considering both the risk of those assets and the cost of capital.

Now that you’re up to speed, here’s a scan I ran using free scanners available at finviz.com. My scan searched for stocks that met three criteria:

1. Beta over 3:  Think of ‘beta’ as the systematic risk of the entire market.  As I write, the stock market volatility is sky-high, so I want to find the stocks that are moving even more than the overall market.  Below are the results of that scan.
2. Price over 7:  Trading options when the underlying stock price is less than $7 is challenging because a $5 stock needs to move 20% to hit the closest $6 strike, while a $50 stock needs 10% of movement to hit the $55 strike.  The $50 stock most likely has a 52.5 strike and maybe a 51 strike as well.
3. Optionable:  Because options give us options.  The trades we share usually have a fixed amount of risk, positioning for unlimited gain.

Below you’ll find scan results (here’s a link to the scan).

After sifting through the 14 names above, VET was my favorite (SM second).

The other names either didn’t have tradable options or, in many cases, the volatility was trading too high (not surprising, considering the extremely high beta of 3 used in the search).

Next, we look at VET using our Volatility Visualizer tool. 

What can we learn from the chart above?

VET has traded within its weekly expected move just 67.74% of the time, going back the last six months.  That was the lowest of the 14 beta names recovered from our scan.

The scan shows that VET moves with a beta of 3; it's not surprising to learn that it’s an international oil and gas producer, a very volatile sector of today’s market.

Entering a trade-in VET with a defined amount of time, a defined amount of risk, with unlimited upside potential seems prudent.

Here’s a trade to follow along with:

Traders might consider purchasing the $25 strike calls (33 days until expiry) and the $17.5 puts.  This trade would bet on volatility continuing to outperform in VET.

This trade (IMO) is best put on dollar neutral. 
It might look like this:

• Buy 2 of the $25 calls for $55:  $110 risk
• Buy 1 of the $17.5 puts for $.95:  $95 risk

The most a trader could lose on this trade is $205.  

For newer options traders, the risk parameters would be the same as holding 200 shares of stock long from $25 for 33 days and holding 100 shares short from $17.5 for 33 days.  The only difference, you can never lose more than your original investment.

This trade should be held until expiry or until you can capture a nice profit (IMO).

Members, let’s discuss this trade in tomorrow’s live session and discuss it in our Discord chat.