August 3, 2022

Watch for the Bear Trap

Dear Friend,

Today we bring you our Option Trade of the Week, an idea generated by our trading team, for your consideration.

Zurich-based Chubb Limited (CB) is the world’s largest publicly traded property and casualty insurance company. CB reported earnings this week that topped estimates. But the market wasn’t sure how to react, as analysts offered a mix of target price increases and decreases.  What’s clear, however, is that analysts are overwhelmingly bullish toward CB, as 84% give the stock a buy or better rating. Perhaps this is due to the “conventional” wisdom that insurance companies benefit from rising interest rates.

But analysts would be well advised to check out CB’s chart. Despite the solid earnings numbers, the stock ended the week flat. Moreover, it failed to break out of a four-month downtrend that has seen the stock drop 14%. This slide has been guided by the 20-day moving average (blue line in chart), which hasn’t allowed a daily close above it since early June. Above that lies the 50-day moving average (red line), which has yet to be tested. It sits at the $196 level, just a point above the short strike of our call credit spread. At its current slope, it will fall below this strike in the coming week. Thus, the stock will have to pierce two points of resistance to move into the money.

If you agree that the 20-day moving average will continue guiding CB lower, consider the following trade that relies on the stock staying below $195 (green line) through expiration in seven weeks:

Buy to Open the CB 16Sep 200 call (CB220916C200)
Sell to Open the CB 16Sep 195 call (CB220916C195) for a credit of $1.40 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $188.64 close. Unless CB drops 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 $138.70. This trade reduces your buying power by $500, making your net investment $361.30 per spread ($500 - $138.70). If CB closes below $195 on September 16, both options will expire worthless and your return on the spread would be 38% ($138.70/$361.30).  

Any questions?  Email Terry@terrystips.com

Did you know that the actual 10K StratHide WYSIWYGegy portfolios conducted at Terry's Tips averaged gains of over 100% in 2017, 2019, and 2020?  The 10K Strategy consists of calendar and diagonal spreads which benefit from the faster decay rates of the short-term puts and calls which are sold (using longer-term options as collateral). You can learn all the details on how to carry out this strategy on your own by subscribing here. Select either Monthly or Annual, click on Sign Up Now and sue the Coupon code D21M for our monthly service for only $98,or D21Y to get a full year of our service for $980 rather than our regular price of $1970, then select Apply Coupon.  Why wait any longer to make this important investment in yourself?

I look forward to having you on board, and to prospering with you.

Terry

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Happy trading,

Terry