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Weekly Trade – LITT Long – APT (Afterpay)

August 26, 2020

Weekly Trade – LITT Long – APT (Afterpay)

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

Be careful when trading APT options – It has poor market maker coverage resulting in wider spreads when entering and exiting positions.

 

 

AfterPay has been flagged by our trade scanners many times since mid-May for this bullish breakout trade idea. The US tech sector has been soaring, and AfterPay has been our local tech success story during the COVID period. The stock was flagged around market open (10:30am) on the 24th of August 2020. The stock had reached new 52 week highs, signalling a continuation of its long break out move.

 

Enter LITT Long Strategy:

  • SELL APT $87.00 October 15 2020 Put
  • BUY APT $82.00 October 15 2020 Put

Ratio 1:1

 

Entering into this strategy on 24/8/20 would have generated $295 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 APT to trade and expire above $87.00, which will render the contracts worthless on expiry, allowing you to keep the upfront premium of $295.

The worst outcome (maximum loss) is for the stock to trade and expire below $82. 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 $82.00, resulting in a maximum loss of $205.

The break even point = $84.05

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.

However, with such a large positive move in such a short time, you may want to re-evaluate the price level at which you manage the trade, or even if you would remain in the trade at all. Some traders would cash in on the large move and close the whole position early, while others would hold until expiry for maximum profit.

If you would like some more information on our LITT Trading strategy, call 1300 805 795. Please note we provide General Advice only. 

 

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 1300 805 795 .

 

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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