9 Minute Read

Tales of a Technician: How I Played Microsoft Like a Fiddle

February 24, 2020

By | No Comments

Me = Clown. Microsoft = Fiddle

Happy Monday, traders! I’m on vacation playing with Mickey Mouse and the kiddos this week. I wrote today’s piece last Wednesday, February 19th. Though some of the prices may have changed, the lessons remain timeless. Enjoy!

Two weeks ago, I spun a tale on one of the first tech stocks known to man – Microsoft (read it here). It concluded with a trio of trading thoughts on how to capitalize on Mister Softee’s delightful setup. The stock’s overbought posture, coupled with high IVR, was begging for one of my favorite strategies, the iron condor.

And, unlike that mean old nasty SPX condor, which almost pecked my eyes out, this one worked perfectly. Let’s take a closer look.

At trade entry, MSFT stock was scorching hot but overbought. Extremely so. Most stocks (sans TSLA, cause it’s from planet Cuckoo) will pause or pullback after such a sprint. If profit-taking is dramatic, then it’s the former. If the selling pressure is light, then it’s the latter.

In Microsoft’s case, bears had no conviction. The selling was phoned in and toothless. As such, it meandered. Partial credit for the levitation or absorbing of all supply coming into MSFT goes to the Nasdaq for its insanely bullish backdrop.

Then

Do you know what else has happened? Implied volatility finally topped. With stock buyers easing off the gas pedal and MSFT chilling out, options demand finally retreated. The IV Rank, which stood as high as 100% just two weeks ago, has come back down to 60%.

Now

That is what we call a volatility crush. While not as dramatic as the post-earnings freefall often seen, it is nonetheless a thing of beauty for traders holding short options positions. Remember, short options positions equals negative vega. And negative vega racks up profits when implied volatility tumbles. Honestly, this is the best possible scenario if you faded the volatility spike with condors.

Stock sideways + vol crush = iron condors deliver quick profits.

On February 11th, with 38 days to expiration, I sold the March 160/170 bull put and the 200/210 bear call for a net credit of $2.13.

Fast forward to February 20th, and there are now 29 days remaining until expiration. Due to the volatility crush and sideways slithering of MSFT, the condor rapidly fell to $1.13.

Do the math. That’s slightly over a 50% gain in 23% of the time of the trade. I call that a payday advance, a frontloading over returns. It was as if Microsoft kindly said,

“No need to wait, Tyler. You’re a kind soul. Instead of making you wait halfway to expiration to capture 50% of your profit, you can have them now. You’re welcome.”

What Mister Softee Said To Me

The $1.00 gain also satisfied my rule of shooting for a 10% gain on high probability trades. Not one to look a gift horse in the mouth, I promptly took profits and bid farewell to Microsoft.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

Leave a Reply

Chart Modal

Tackle Trading