Hey Gang, Raghee here.
Let’s discuss Dropbox and how patience, time, and timing are important when taking advantage of a potential continuation to the upside.
Why would we look for a continuation to the upside…?
The overall trend in Dropbox, before it turned into a chop, from mid December to the end of January, was an uptrend. When you have a market that has gone into chop but the trend that preceded it was an uptrend… you’re gonna stick with that bullish bias, or what I like to call, directional bias.
That directional bias keeps me from getting short and reminds me that pullbacks to support are going to be my best position.
So let’s talk about pull backs to the support level…
Whether that be the 13th of January, the 19th, or even the 25th , we were looking at the 21 calls for the April expiration. It took some time for this market to finally have a lone day of bullishness but what a day it was.
Finally we have compression…
It’s like shaking up a can of coke. The price action became narrow from about the 20th of January to the 26th until finally it went to the upside.
Why the upside? Because you respect the trend that was. The compression led to a sudden expansion and on the 27th these were trading upwards of about $5 each. That’s where a lot of market participants typically get in. These participants are gonna pay anywhere from $4 – $5+ to get long because there was a breakout.
So let’s rewind a bit…
Here at the yellow marks, the typical price that these options could’ve been bought for was anywhere from $270 to about $355 (or $2.70 to $3.55). Again, the price went to over $5 on this single move. That’s what we’re talking about when we look at inexpensive options, the ability to scale in.
In this case we had three distinct opportunities, the ability to scale in, and when the market finally has that burst of momentum where a lot of traders start to buy the options.
We’re the ones selling to them, scaling out as that demand hits the market, so a low demand environment to buy, high demand environment to liquidate. In this case, again, we’re talking about $500 or five points with an average price of $270 to $355 if we get in.
We’re looking when everyone else is not in a frenzy to be doing that.
Avoid the frenzy, take advantage of it, which is exactly what we did in Dropbox, Gang.