Why is JD betting against Wall Street?
Hey everybody, JD here with your Rational Trader Market Analysis daily.
In today’s video, we’re going back to the call credit Mean Reversion Cash Machine trade.
This setup has been working beautifully all quarter, and through this reporting season the hit ratio has been darn near perfect.
Yesterday, we put on a call credit spread in Best Buy (BBY), and we scored on that one. Today, we’re looking at Ulta Beauty (ULTA).
Why Ulta Fits the Bill
On the chart, Ulta is trading close to two standard deviations above its mean — what I call the “Two Sigma” level.
That’s a statistical marker that shows when a stock is stretched far above its recent average. And the farther you get from the mean, the stronger the pull back toward it tends to be.
That gives us room to sell a call option far above the current price — the $600 strike — and still collect a premium that’s worth taking.
The Trade Setup
Here’s the structure:
- Sell the $600 call
- Buy a higher-strike call for insurance
That caps the risk while letting us keep the premium. In this case, it’s about 50 cents per contract.
Now, the stock would have to rally more than 13% in a single day to threaten this trade. I don’t see that happening, especially with Ulta reporting earnings after the close today and this option expiring tomorrow.
Why I Call It a Slam Dunk
With Two Sigma down at $537.96, and our short strike sitting all the way up at $600, this is what I’d call a slam dunk call credit spread. Defined risk, generous cushion, and a very low probability of loss.
If Ulta does what stretched stocks usually do — stall or revert lower — we keep the credit and ring the cash machine one more time before the week is over.
Wrapping Up
That’s the trade for today, folks.
No video tomorrow. Monday I’ll be back with more Mean Reversion Cash Machine trades.
This is JD — take care, have a great day, and we’ll see you next time.
Talk soon,
JD
The Rational Trader
