Expecting a Correction, which Stocks to SHORT?
Both $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ are reaching new historical high but their 14 days Relative Strength Index are above 70 indicating they are overbought. With market breadth narrowing and above 70 many are expecting a correction soon.
Many stocks are way overbought, so which one should I be shorting through options?
Let’s narrow our selection to stocks whose 14 days RSI is above 80 and with market capitalization of above 15 billion. Smaller caps stocks are just too risky.
From these criteria, we have:
1. Super Micro Computer
2. Eli Lilly and Co
3. ASML Holdings
4. Spotify Technology
5. Taiwan Semiconductor
8. KKR & Co
10. Boston Scientific
11. Toyota Motor
1) Super Micro Computer is for the risk takers. Although the RSI is currently at 93, it has recently more than doubled its value in 3 weeks’ time. If I have more than sufficient margin, I will sell naked calls near the strike prices of 1000 expiring end of this week. There is a need to take note of the extremely high margin requirement.
2) Eli Lilly and Co has just reported its earnings last Tuesday and with its current RSI at 87, it is a good candidate for shorting as I do not expect the prices to rally too much in the near term. I may try to a bear call spread (expiring this week) by selling the lower strike price call at around 800 and buying the higher strike price call at around 860. However, it will depend on the higher call strike ASK prices available as the prices fluctuate a lot due to the volatility.
3) ASML Holdings reported earnings on 24 Jan 2024 and with its current RSI at 85, it is also a good candidate for shorting. However similar to LLY, the higher call strike ASK prices are very high due to the volatility. If I have more than sufficient margin, I will sell naked calls near the strike prices of 1050 expiring end of this week. For next week the volatility of the options is expected to go higher as NVDA is reporting earnings.
4) Spotify Technology also reported earnings last week and has a current RSI of 83. However, it currently at 240 and has already retreated from its recent high of 248.67. With the low implied volatility of it options, there are no significant “meat” to chew on for options. So much for Spotify “premium”. Moreover, its historical high is 387, technically there is still quite some room for Spotify to rally. With CPI news coming this week, I would probably avoid shorting the stock.
5) $Taiwan Semiconductor Manufacturing(TSM)$ projected strong growth this week and propel the stock to near its historical high of 139.465. With its current RSI is at 82 and decent implied volatility, it is also a good candidate for shorting. I would probably sell some naked calls directly at the strike price of 147 expiring this week, giving around 10% room for the stock to rise. If my margins is the sufficient, I will choose to do a bear call spread at 147/170 or 147/175.
6) $NVIDIA Corp(NVDA)$ is reporting earnings on 21 Feb 2024, the implied volatility is expected to trend higher as it approaches the earning date. However, to play relatively safer, I will only trade options on it that expires end of this week although its current RSI stands at 82. Having said that the stock has been riding is AI catalyst for a pretty long time and rise about 45% in value since the start of 2024. I feel that there is still some room for the stock to rise but the room should be limited. As such I will continue to do bear call spreads on NVDA that my margins can afford. For now, my focus will be around the 830/880 to 850/900 ranges.
As for the rest of the stocks like Saia, KKR & Co, Eaton, Boston Scientific and Toyota Motor, I will probably give them a miss as the implied volatility is too small and there is not much profit to trade their options.
Do take note of the release of CPI this week as it can potentially carry the stock market higher. Let me know what stocks are you aiming to short in the comments below.
Lastly Happy Chinese New Year to my friends. Huat Big and always trade within your means.
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