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3 Smart Trades for a Troubled Market

Tyler Craig

Another trade war headline delivered another nasty market open. With volatility on the rise and overnight swoons in stock futures now the norm, the environment has turned treacherous for directional traders. If you’re seeking the best trades to weather the turmoil, I suggest high-probability option selling plays that allow you to sidestep the chop all together.

These strategies create a wide profit range, giving ample room for stocks to shake and bake before delivering losses. Additionally, they profit from the passage of time, relying more on the clock than an accurate directional prediction to deliver the goods.

In selecting the best stocks for these options trades, I focused on two companies exhibiting relative strength and one Index to game the entire market.

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Let’s take a closer look.


3 Smart Trades for a Troubled Market: Advanced Micro Devices (AMD)

3 Smart Trades for a Troubled Market: Advanced Micro Devices (AMD)

Source: ThinkorSwim

Advanced Micro Devices (NASDAQ: AMD ) has formed a clear bull flag pattern on its weekly chart during the recent market drama. Buyers continue to emerge every time AMD has tried to break support. Today’s drop is perhaps the sole exception, with the stock breaching the 50-day moving average.

And yet, the weekly flag pattern is still intact, suggesting the downside should be limited over the coming weeks. To profit, consider selling naked puts such as the July 24 strike. You can sell it for $1.01 to score $101 per contract. You will capture the reward if AMD sits above $24 at expiration.

The $24 put’s delta is 0.27, so consider your probability of profit 73%.

For more confirmation before pulling the trigger, you could wait for AMD stock to break above today’s high — or at least turn its intraday trend higher.


Disney (DIS)

3 Smart Trades for a Troubled Market: Disney (DIS)

Ever since scoring a major breakout on the Disney+, which was reveal last month, Disney (NYSE: DIS ) has been one of the best stocks for bulls to watch. DIS stock has pulled back from its recent record but is holding steadfast to the 20-day moving average. With its strong underlying fundamentals and positive sentiment, dips have to be viewed as buying opportunities.

If you’re willing to bet Disney shares stays aloft then sell the July $125/$115 bull put spread for $1.05. The reward is limited to $1.05 and will be captured if DIS is above $125 at expiration. The risk (and cost) is capped at $8.95 and will be lost if the stock falls below $115.

The delta of the 125 put is 0.2, so the probability of profit is a lofty 80%.


Russell 2000 Index (RUT)

3 Smart Trades for a Troubled Market: Russell 2000 Index (RUT)

Source: ThinkorSwim

Instead of trying your hand at picking the best stocks, how about a trade on the entire market ? Small-caps have underperformed large caps over the past month, driving the Russell 2000 Index (INDEXRUSSELL: RUT ) into a downtrend.

Today’s support break reveals the correction is worsening, and it may be a while before a new uptrend emerges. To capitalize on continued neutral to bearish behavior, you can sell out-of-the-money call spreads.

For example, if you’re willing to bet RUT remains below 1,600 for the next 56 days, you can sell the July 1,600/1,610 bear call spread for $1.70. The reward is limited to $1.70 and will be captured if the calls expire worthless. The initial cost and total risk if $8.30. To minimize the damage if RUT rises too far,  you could exit if it touches 1,600. By risking $8.30 to potentially make $1.70, the spread offers a potential 20% return. And it’s easier than trying to pick the best stocks to play individually.

As of this writing, Tyler Craig held neutral options positions in RUT and DIS. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.

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