STLD - a Bearish PCCRC

So now that the markets have fallen below their 200dMA, it is possible that we are entering a bearish phase. For my trading it means that the stocks that jump due to earnings are going to be less and less common. Further, we may have many stocks falling in disgrace.

You may say, why not just follow the opposite game plan and trade stocks that fall 10% right after earnings? because such stocks are likely to do that accompanied by high IV. So we have to find stocks with high probability of a strong move to the downside, but with low IV options. In my disks I have demonstrated how to select candidates for the bearish Elliott trade set up. Using that strategy, I picked STLD on July 23. I entered a Bearish PCCRC. This is similar to his bullish cousin, but with one important variation: The long call is one strike price above the other three legs of the trade. Please not the trade below, and you may even want to reproduce it if you have a Platinum subscription. Note that I made an adjustment yesterda (more on that in below). Here is the trade:


Please click on this image to enlarge it.


How come the risk is non-existent and the risk graph is all on the profit area? The good news is that there is a factor that works in your favore with the PCCRC that is invisible to the risk graph: volatility spike. The bad news is that spikes can desappear quite rapidly, and you must take action to either exit the trade, taking all profits and cash off the table, or at least sell some of your high IV longs because they are now expensive and can erode your profits if IV begins to decline.

Here is the IV chart:

Notice how the IV has been on the rise. This is what has cause the profits in my PCCRC. At this point, the likelyhood of a temporary bounce is increasing, so I decide to take profits by selling a portion of my long puts. What do I accomplish with this move? reduce my risk of a volatility whiplash. If the stock continues to decline, I have sufficient long puts to make gains, but if the stock bounces back, IV is likely to decline. Hopefully, the move would be toward the strike price near expiration, allowing me to either rollover with theta gains, or simply exit the trade at a good point.

The ideal trade leaves you with no risk, and a gain that is at least 100% on your risk. The transformations should result in a better trade.... What could be better than no risk at all.!?