FIT April 7 Calls – Room To Run?

I bought FIT April 7 Calls today.

I am continuing to look for technical setups that are paired with attractive Implied Volatility levels to enter a trade.

Starting with the underlying chart, we are getting close to filling the gap from last month and are very stretched in relation to the key moving averages:

FIT 1.png

Chart from FreeStockCharts.com

My view here is that we are starting to see some buying, the short-term sellers are underwater on their sales (as you can see by being above both the 10 and 20 Day Moving Averages), and we may see a short-covering rally continue as a result.

Looking at a 30-minute chart, we can see the beginning of my hypothesized short-covering:

FIT 2.png

Chart from FreeStockCharts.com

So what I’m looking at here is two-fold.  First, we are above the recent high levels (not quite into the gap, but above much of the recent price action).  This again points to recent sellers being down money so far.  Second, we saw some fairly aggressive buying start yesterday with that steep up-trend.  As we re-tested that steep trend line, I entered my options trade.  I want to see that continue to hold and accelerate as we approach yesterday’s high of 6.48.  If we get above there, we should see some more fairly aggressive stops.

So, we’ve got an interesting technical setup that could get us into the $7s quickly and perhaps press toward the 100 Day Moving Average at $9 on a short-covering rally.  This is interesting for me, so I want to check the volatility levels.

Now we need to move on to the options market.  Since earnings, IV has come crashing down and is now fairly attractive:

FIT 3.png

Chart from LiveVol

We are at the low end of the range for Implied Volatility and we are also seeing continued higher Realized Volatility than Implied Volatility.  This would point toward a good setup for a little long Vega and a little bit of long Gamma.  Since April options have a nice balance of both, and will give me some time to let the story play out, that’s where I focused.

I debated the $7 and $8 calls due to the potential for leverage here.  If we get above $7, I’ll have to start thinking about rolling my longs if I want to stay in the trade.  At the same time, a move to just fill the gap at $7.15 would not make my $8 call relevant.  On a move to $9, the $8 call would perform a little bit better.  But, the $7 call has more relevant Gamma and Vega right now.  On a move to $7+, I have a lot of ways I can trade around my position.  If I bought the $8 call, on a move to $7+, I would simply stick with the $8 call as it’s still 10%+ out-of-the-money.  So, I chose the $7 call to have a position that gives me more options (pun intended) for how I want to trade on a move above $7.  While the $8 call may end up being the better trade at the end of this trade, I can roll into that on a move above $7 if the story still looks interesting to me.

 

 

 

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