Trade Of The Week: Long Call – XJO

October 7, 2020

Trade Of The Week: Long Call – XJO

This week we have selected a long call on the XJO as our trade of the week.

This week we have selected a long call on the XJO as our trade of the week.

The XJO index has been trading mostly within a range of 5800 to 6200 since mid-June 2020, with the 5850 and the 6000 level also being major support and resistance levels.

On the morning of Friday the 2nd of October, the Aussie market moved towards the 5800 level, and initially found some solid support there as it had on 29th of June 2020. Breaking this major support level could be a sign of a bearish breakout, or it could prove to be a fake-out. With the US election still 4 weeks away in early November the market would be jumping the gun if it were to break out this early.

Then came the news of Donald Trump contracting the coronavirus. The US markets were closed and most Americans were asleep when the news broke, so the Aussie market traded lower as a result of uncertainty around how the US markets would react.  In the late afternoon, the Aussie market fell below the 5800 for the second time in 3 months, with the previous attempt occurring on the 22nd of September. The market closed at 5791.5 having reached a low of 5779.6 prior to the close.

This was a great opportunity to buy calls on the XJO cheap. The reasoning behind this is simple.

The US election is in November and the 2 major party candidates are aged 74 and 77. The coronavirus is rampaging through the US and has been for most of 2020. The susceptibility of the older generation to COVID-19 is well documented and is public knowledge (therefore you would assume this risk has been priced into the market). Given Trump’s irresponsible attitude towards wearing facemasks it was only a matter of time for him and his senior team to be struck down by the virus. No reasonable person would be surprised at this development.

But even if this news were a shock to some market participants, how much of an effect could it really have? Trump only has 3 months left in his first term and polling suggests that Biden is well placed to win the Presidency (however the polls have been wrong before). With the markets pricing in a likely Biden victory, the health of Donald Trump isn’t likely to have a major effect on markets over the next 4 years. Of course, if this had occurred early on in Trump’s first term, it would be a different story.

Enter Long Call:
B 5800 15th October 2020 Call (E) @ $105.00

Max Profit: unlimited
Max Loss: $1050
Break even on expiry: 5905 points

We do not expect the market to take long to bounce off the 5800 level. The last time the market tested this level was on the 22nd of September, the recovery was rapid the following day. So we enter into a long XJO call with 13 Days to Expiry. This is a monthly expiry so the markets will have higher liquidity when compared to weeklies, meaning we can enter and exit the position with ease and with a smaller spread. The call’s strike price is at the lowest end of the XJO’s recent trading range – if the market turns against us initially there is value in holding the position until it returns to this trading range. 

With the 50 Day MA (5996) and 200 Day MA (6016) converging around the major resistance level of 6000, we expect this to be a major resistance level over the coming days. With time decay working against you, it may not be worthwhile waiting for the market to push through this resistance level so we will look at exiting if one of the following criteria are met:

  1. The market hits 5950
  2. The market rapidly breaks through 5900

Whether you’re just starting out or you’re a serious options trader we have designed an education program for all levels. The Trading 360 Summit is an online educational event which was launched this week. This five week summit brings together professional and private traders, market makers and fund managers to help you up your game as a trader. If you are interested in attending, please Click here to register.

We wish you good luck with your trading. If you would like some more information on options trading strategies, call 1300 805 795. Please note we provide General Advice only. 


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