Last update: August 2021

You read the title and I know what you’re thinking. Tyler are you cuckoo bananas!? We don’t short uptrends. We trade with the trend. Indeed we do. We buy uptrends at support and when breaking above resistance. We sell short downtrends at resistance and when breaking below support.

But come close and I will tell you a secret.

Sometimes, I short uptrends.

It’s rare, to be sure. But, there are situations where the setup is too tempting to pass up. I’m talking about a stock that is extremely overbought and has high implied volatility. It works best if it’s a large-cap company with more stable price action. I don’t want to get caught shorting some small-cap firecracker.

A recent example is Zoom (ZM).

Zoom, but not too much!

Take a good look at the ZM stock chart below. I hit the rewind button back to September 23rd because that’s the day I entered the trade. Let’s discuss the setup.

1. One: ZM was overbought. It ran from its pivot low of $345 to nearly $530 in a single swing! That’s a 54% run over a short three-week span. Overbought? Undoubtedly.
2. Two: Volume crescendoed during the ramp, ultimately ending with a sharp increase on the 23rd. If you didn’t know, blow-off runs often end in high volume. It’s the johnny-come-latelys piling on.
3. Three: Implied volatility was over the 50th percentile, making option premiums ripe for the selling.

You’ll note the candle on the 23rd had a long upper shadow. That means there was an intraday bearish reversal, or evidence that sellers were already swarming. Had we ended with a really bullish candle, you can bet I wouldn’t have pulled the trigger.

The Strategy

My preferred strategy is selling OTM bear call spreads. It provides a wide margin of error and the ability to scale-in if the stock ends up rallying for a few more days before finally pulling back.

I sold the Oct $610/$620 bear call spread for $1.60 credit. Consider it a bet that ZM wouldn’t rise to $610.

Now, here’s the updated chart.

The stock didn’t pull back aggressively, but it did pause. That’s good enough for a bear call to profit. Had I done a more directional trade like buying puts or put spreads, I probably would have lost money. That’s why I prefer the bear call in situations like this. I knew the stock was overbought and due for a correction. But, I didn’t know if it would be a retracement or consolidation. So, I picked a strategy that profited in either case.

At this point, the spread has fallen from $1.60 credit to around 40 cents, and there’s only 11 days remaining. I could exit now or ride it to expiration.

I didn’t get the chance to scale-in to additional contracts because the stock never moved adversely. It means I only won on a partial position. But that’s a good problem to have.

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