A Trade That Worked In This Market

Rolling With The Market Rotation For A 236% Gain

An Alternate Approach 

In my last post (“Not In This Market“), I described an approach that didn’t work in this market, placing an bullish trade on Super Micro Computer, Inc. SMCI when it looked oversold on a Relative Strength Index, and underpriced on a PEG basis. 

Not In This Market

Why our bullish trade on $SMCI was a bust, and what we're going to differently next time. https://t.co/VJ7QKf7Ntj

— Portfolio Armor (@PortfolioArmor) August 7, 2024

I described an alternate approach there as well: 

In our current risk-off market:

• Cheap on a PEG basis isn’t cheap enough. Going forward, we’ll look at valuation more broadly. On a scale of 0-to-10, with 10 being the best, SMCI had an overall Valuation Rating of 4 according to Chartmill earlier this week. Next time we bet on a beaten-down stock, we’re going to look for a 6 or better. 
• Low RSI isn’t low enough. Going forward we’ll look for technical consolidation. 
• Weekly trades aren’t long enough. Going forward, we’ll give our trades more time to play out. 
• Wait until after earnings. In this market, we’re going to see stocks that beat on top and bottom lines drop after earnings too. Better to bet on beaten-down stocks when this quarter’s earnings are in the rearview mirror. 

A Trade Using That Approach (Mostly)

My subscribers and I had a successful exit on Thursday, and looking back at our entry into that trade, it met three out of four of the bullets in that risk-off approach.

The company was PetIQ, Inc. PETQ, and here’s what I wrote about it in that post last month: 

Adding More Small Cap Exposure

This one came up in one of my Chartmill screens yesterday, and it happens to be releasing earnings in a couple of weeks. As with yesterday's small cap, we're going to use longer dated calls to minimize IV crush and be positioned to benefit if the small cap rally continues into the fall. Some figures on this name:

• Technical Rating: 7 (on a scale of 0-10)
• Set-Up Rating: 7
• Valuation Rating: 7
• Piotroski F-Score of 8 (on a scale of 0-to-9)

It beat on top and bottom lines last time it reported earnings. Our options trade will cover this and next quarter's earnings releases.

As you can see there, this met three of the criteria in the alternate approach I sketched out in yesterday’s post: 

1. Rather than rely on RSI, we looked for technical consolidation (the Set-Up Rating is a measure of technical consolidation. 
2. Rather than rely on PEG, we used Chartmill’s Valuation Rating, which takes into account a number of valuation metrics in addition to PEG. 
3. And rather than use short-dated options, we used options expiring in January for this one. 

The one criteria we didn’t meet above is that we didn’t wait for earnings to place this trade–we placed it about a week before earnings. 

Our PetIQ Trade

Our trade was buying the $22.50 strike calls on PETQ at $2.50. 

PETQ shares spiked about 50% yesterday, on news that it would be taken private at $31 per share. We sold our calls for $8.40 today (Thursday), for a profit of 236%. 

Granted, I had no idea the company would be taken private, but often if you find good entries on well-run companies, good things happen. 

Trying This Approach Again 

Running this same screen again today yields no names, if you limit it to small caps. However, if you take away the market cap restriction, five names show up. We may place a bullish bet on one of those five names on our next down day. 

In the meantime, we took advantage of today’s up day to place two bearish bets, one on a weak regional bank, and another on an Internet company nearing the end of its IPO lockup period. 

If you’d like a heads up when we place our next trade, you can subscribe to our trading Substack/occasional email list below. 

And if you want to take advantage of the next rally to hedge, you can download our hedging app here.

If you’d like to stay in touch

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we’re using that for our occasional emails now).