10 Minute Read

Options Theory: Trading the ARKK Dip

July 8, 2021

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In this week’s Team Phoenix trading lab we focused on the powerful technique of scaling in & out. One day later, the market decided to puke which gives us a prime opportunity to put the tactic into practice. Here’s how I would apply it to ARKK, which was one of the ETFs on our watchlist this week.

The Setup

ARKK had a bull retracement pattern coming into Thursday. The down gap pulled prices directly into potential support at the 200-day moving average. Given the strength of the prior advance, I was very interested in buying this dip.

$ARKK chart

The Trade

As is often the case, I was eyeing bull put spreads. The Aug $105/$100 put spread was my structure of choice. It was trading for over 60 cents this morning. The $105 put has a delta of 0.15, giving the trade an 85% probability of profit.

My plan for scaling would be as follows:

  • Tier One: 60 cents Target: 10 cents
  • Tier Two: 90 cents Target: 40 cents
  • Tier Three: $1.20 Target: 70 cents

Sometimes I automate the entry into tiers two and three, other times I wait for the price to get there and then look for a technical trigger to hit before entering. Both approaches have their respective pros/cons.

The Trigger

Would you call today’s bounce back from the down open enough confirmation to enter the first tier? Or would you wait for tomorrow and make sure we push above today’s high? There isn’t a right answer. I’m more aggressive on my first tier and tend to enter at the first sign of strength. Today would qualify for that. The 5 minute trend turned higher about 30 minutes into the trading day and has been making higher pivot highs and lows since.

$ARKK chart

By entering quicker, I get a better credit on the spread than waiting longer. While some may argue for more confirmation, such as waiting to see if prices break today’s high during tomorrow’s session, they do so at the cost of getting less credit. And, even if we do push higher tomorrow, there’s still the risk that we rollover.

In fact, that’s always a risk. But, that’s what trade management is for. We do the best we can to get a clean entry with some confirmation. Then we deal with the certain percentage that misbehave.

I’ll be tracking this trade alongside Team Phoenix over the coming days and weeks. Come check it out if you haven’t already!

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