October 18, 2022
Today we bring you our Option Trade of the Week, an idea generated by our trading team, for your consideration. But first, I would like to remind you that our proprietary 10K Strategy has generated average annual gains of 60% for the past five years in actual brokerage accounts (including all commissions) carried out for our subscribers. For 2022 to date, a dismal year for the market, our actual composite average was a 8.4% gain. While this was clearly disappointing compared to our earlier results, it was considerably better than the 25%+ losses incurred by the major market indices.
On the Rocks
BlackRock (BLK) is the world’s largest asset manager with more than $10 trillion in assets under management (AUM) heading into 2022. But that has changed dramatically, as evidenced by Thursday’s release of BLK’s latest earnings report that showed AUM tumbling 16% in the third quarter. The Ukraine war, high inflation, rising interest rates and the strong dollar were all cited as reasons why investors were pulling money from BLK funds. The company is also receiving backlash for its support of environment, social and governance (ESG) initiatives.
The stock gained ground the day after the report, but that was on “Bonkers Thursday” when a huge rising tide lifted all stocks. BLK retreated on Friday after encountering solid resistance at its 20-day moving average (blue line). This continues a downtrend that has been intact since mid-August. The slide has been perfectly contained by the 20-day, which hasn’t allowed a daily close above it in nearly two months. The stock is also down 40% this year, despite 75% of covering analysts rating the stock a buy.
This bearish trade is a bet that the problems plaguing BLK won’t go away any time soon. We’re going with a call credit spread with the short call sitting above the 20-day, meaning the stock will have to pierce this resistance to move the spread into the money.
If you agree that BLK will continue to decline under the weight of the 20-day, consider the following trade that relies on the stock staying below $580 (red line) through expiration in six weeks:
Buy to Open the BLK 25 Nov 590 call (BLK221125C590)
Sell to Open the BLK 25 Nov 580 call (BLK221125C580) for a credit of $3.40 (selling a vertical)
This credit is $0.10 less than the mid-point price of the spread at Friday’s $550.95 close. Unless BLK sags quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $338.70. This trade reduces your buying power by $1,000, making your net investment $661.30 per spread ($1,000 – $338.70). If BLK closes below $580 on Nov. 25, both options will expire worthless and your return on the spread would be 51% ($338.70/$661.30).
Any questions? Email Terry@terrystips.com
Testimonial of the Week
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