Strategy selection is an evergreen topic. It’s relevant in all markets and is something I get asked about almost every week. I’ve written about it periodically with my last instance highlighting a strategy matrix like this one:

For today’s angle, I want to take one of the trade ideas from the Options Report and discuss the thought process and justification I would use when choosing each strategy.

Let’s start with the bull retracement pattern in Marvell Technology. The company has been steaming higher amid optimism surrounding the 5G revolution.

Long Call

First, At $34, the stock price is low enough to make long calls an intriguing play. If the call is cheap enough, it could alleviate the need to use a stop loss and avoid any loss-inducing whipsaw.

Second, MRVL is a mover and a shaker. It’s more than doubled since mid-March and has the type of volatility that could create a big payday for an unlimited reward trade like a long call.

Third, its implied volatility rank is 28%, which is a whisker away from the lower quartile. It’s depressed enough to suggest premiums are relatively cheap.

Idea #1: Buy the Aug $33 call for $3.40.

Short Put

First, at $34, the low stock price will keep the margin required for a naked put minimal.

Second, the high realized volatility for MRVL likely means its options carry larger than average premiums. It’s kind of like AMD in that way. As such, I think there will be plenty of out-of-the-money put strikes that can be sold while still generating a 10%+ ROI.

Third, at 28%, the implied volatility rank isn’t as high as I’d like, but also might not be so low as to be an automatic deal-breaker. I’ll need to build out a few short put trades to see if the ROI and distance out-of-the-money is satisfactory.

Fourth, I like the fundamentals of MRVL and don’t mind owning shares. The naked put could serve as a gateway into a longer-term stock position.

Idea #2: Sell the July $30 put for 53 cents per share or $53 per contract. The initial margin required is $300 and translates into an ROI of 17.6%. If assigned, I’ll be long the stock at $29.47.

Bull Call

First, At $34, the stock price is low enough to make long calls an intriguing play. BUT, I want to reduce the cost further and enhance the leverage in the trade.

Second, I explored the long call costs and found a $300 price tag too high if I don’t want to use a stop loss.

Third, its implied volatility rank is 28% suggests premiums are relatively cheap. This works in favor of long calls AND bull calls.

Fourth, I don’t have a good track record with long calls but have found more success with bull calls.

Fifth, the bull call has a lower breakeven and a higher probability of profit for the long call. This is a better fit for my personality.

Idea #3: Buy the Aug $35/$40 bull call spread for around $1.50. The risk is limited to $1.50, and the reward is $3.50.

Takeaways:

Which trade idea do you find the most compelling? Do you see each of their respective advantages? Perhaps you find all three tempting. This is why there isn’t one right way to play each setup. Three traders could analyze the same pattern and come away with three different trade ideas. And here’s the beauty, if MRVL continues trending higher then they’ll all make money.

If I wanted to add in another bullet point to each strategy justification, I would have looked at existing portfolios. Perhaps one trader is already really bullish and wants to mix it up with a cash flow trade like a naked put. Maybe another trader is leaning bearish and really needs to add some positive delta to the portfolio, so they go with the long call.

I hope this exercise gives you a better idea of how to think through strategy selection.

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