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Trade Of The Week: LITT Long – GMG

August 5, 2020

Trade Of The Week: LITT Long – GMG

The LITT Long trade is a quant designed bullish strategy. You enter this trade when you expect a large positive movement in the price of the underlying.

The LITT Long trade is a quant designed bullish strategy. You enter this trade when you expect a large positive movement in the price of the underlying.

Setting up the trade involves selling an in-the-money put, and buying at-the-money protection. By selling an in-the-money put, you receive an upfront credit for entering the position. Your best outcome is for the whole position to expire worthless, so you can keep the upfront premium.

To follow the LITT Trading strategy, you will enter the position when the following criteria have been met:

  • The share price is above the 50 Day MA
  • The 50 Day MA is above the 200 Day MA
  • The 50 Day MA is trending upwards
  • The share price is above the 52 week high
  • The ADX is above 20

 

Goodman Group (GMG) is an ideal candidate for this trade in the current global economic environment due to its service offering in the real estate sector. Goodman is a global property expert in logistics and business space. As a business, they own, develop and manage industrial property in 17 countries. This includes warehouses, large scale logistics facilities, business and office parks globally.

Demand for their warehousing products and storage facilities is looking to peak during this economic downturn, as businesses are forced to suspend operations and require storage for their unutilised assets. The COVID-19 pandemic has created further demand as global businesses that are worried about logistics supply chains are also buying up food and other staples to ensure steady local supply – all of which needs to be stored until it is used. As supply chains are disrupted, global trading businesses are also looking for extra storage space and logistics services for any excess shipments that may be delayed. This all points to an increase in demand for GMG’s services, which has been reflected in the stocks great performance. GMG is now trading higher than pre-COVID levels, pushing through 52 week highs on Thursday 30th of July.

Goodman Group briefly met criteria on the 29th of July during intraday trading before pulling back at the end of the session. However the next day on the 30th of July 2020, GMG convincingly met all the LITT Long trade criteria, with the stock price reaching $17.14 in intraday trading and reaching all-time closing highs of $17.01. GMG’s ADX was 39. The share price was comfortable above the upward sloping 50 Day MA and the 200 Day MA.

The stock once again met the LITT Long trade criteria yesterday reaching new all-time highs.

To enter into a LITT Long strategy today with GMG we will sell a put at a strike price of $18.50 and buy protection at a strike price of $17.50. The expiry date will be between 30 and 60 Days to expiry, which narrows down to the 17th of September 2020. The current share price of GMG is $17.42.

 

Enter LITT Long Strategy:

SELL GMG $18.50 September 17 2020 Put

BUY GMG $17.50 September 17 2020 Put

 

Ratio 1:1

Entering into this strategy will generate $63.50 of upfront premium for each set of one long and one short American put contracts, before brokerage and ASX fees.

The best outcome (maximum profit) is for GMG to trade and expire above $18.50, which will render the contracts worthless on expiry, allowing you to keep the upfront premium of $63.50.

The worst outcome (maximum loss) is for the stock to trade and expire below $17.50. Your sold put will expire in-the-money, however your bought put will offset any further losses if the price falls below it’s strike price of $17.50.

The breakeven point is at a stock price of $17.865.

The great thing about the LITT Long trading strategy is that you have room to move if the market turns against you. Based on the LITT trading rules, if the stock experiences enough selling pressure to pull back below the support level at the 50 Day MA, you can manage the trade by closing out the sold put and remain in a long put position. This allows you to profit from the falling share price as it continues to fall lower.

And if the market then rebounds, pushes back above the 50 Day MA, and trades above recent 5 day highs, you can repair the trade by re-entering the sold put position.

With the large price gap between the stock price ($17.42) and the 50 Day MA ($15.57), you may use your own discretion to choose another major support level to manage the trade and repair the position. We would expect a major support level around the pre-COVID highs of $16.78, which was the same resistance level that signalled the break out trade.

 

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795.

 

Past returns do not reflect future returns. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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