Stocks got rocked on Friday… and some traders are thinking the top has been set for now…
While others are calling this a simple pullback.
Who really knows who’s right at these levels.
However, I do know that there will be traders looking to “buy the dip”…
And buying shares outright or calls can be dangerous.
That’s why I want to show you part of the “casino” strategy today.
You might be thinking… “Jason, isn’t buying calls a risk-defined risk?”
Sure, but the odds can be stacked against you because you would need the stock to rise, as well as the level of implied volatility.
Not only that, but time is working to my favor.
It’s one strategy I’ll be looking to use if I want to play for a rebound.
How does it work?
When it comes to buying calls or shares, I can’t get a whole lot of sleep. You see, if I’m long calls or shares in a stock that can be affected by drops in the market…
There’s a chance those calls lose value fast… or the shares gap down… if the market sells off.
That’s why I actually look to use the “casino” strategy.
You see, with this strategy, I can go to bed fine because I believe the odds are stacked to my favor.
Keep in mind, the “casino” strategy can be used for both bullish and bearish bets… but I’m going to stick with bullish trades for this lesson.
Let’s take Facebook (FB) for example.
Chart Courtesy of StockCharts
The stock has been in the news, as many firms will be starting to boycott Facebook ads. That should hit the stock pretty hard.
Shares dropped by 8.32% on Friday and closed at $216.08.
With such bearish activity, the premium for the puts have been juiced up… and the level of implied volatility are really high.
Now, let’s say I wanted to play the dip in FB… buying calls could be dangerous because this can take weeks to develop.
If FB doesn’t rise within a certain time, the premium can get sucked out and those calls may expire worthless.
On the other hand, with the “casino” strategy, it’s different.
You see, I don’t necessarily need the stock to go up.
In fact, it can stay sideways or even drop a little… and I’ll still be in a position to realize gains.
Not only that, but with implied volatility so high… I would benefit from drops in volatility… and time decay actually works in my favor.
Moreover, the odds can be stacked to my favor.
Let me show you what I mean by that.
Take a look at the screenshot above for the puts.
These have above 2 weeks until expiration… and there is value for the deep OTM puts.
The level of implied volatility is really high for them as well.
Now, I would wait until the implied volatility to get to extreme levels…
But I would look to use a risk-defined strategy to sell the puts to collect premium.
If you look at some of the probabilities in the yellow rectangular area…
The odds are stacked against the put buyers.
I mean take a look at the $180 strike price puts. They closed at $1.27 X $1.38. There is an 88.12% chance those expire out of the money.
Can FB break below that level?
But there is a slim chance according to the “Probability OTM” indicator.
I believe some traders will be piling into those puts now… and the “dumb money” might buy them at elevated levels.
If I do decide to play for the rebound in FB, I’ll look to use the “casino” strategy.