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Hey everybody, JD here with your Rational Trader Market Analysis daily.
In today’s video, I’m going to change things up just a little bit in terms of our Mean Reversion Cash Machine trades.
I crunched the numbers all day long on several stocks and honed in on three.
This time around, though, the pricing of the options — compared to the risk we’d take on credit trades — just didn’t line up with what I look for when making these kinds of trades.
Credit Trades Weren’t There
I turned to our reverse iron condors next, but same story — the option pricing really wasn’t good enough to justify placing those trades.
Then I thought: we’re doing reversion to the mean here. What are our expectations? Can we just push a little of our chips into the middle of the table on a debit spread?
Ding, ding, ding. That’s the trade we’re going to make today.
Trade #1: Brinker International (EAT)
First up is Brinker.
Shares are up about one and a half percent today, but I really liked this yesterday and the day before when we were trading right around two standard deviations below the mean.
Restaurant stocks have been beaten up over recession worries. Any company facing the consumer has been sold first and asked questions about later. I really like Brinker International here.
The trade: a simple call debit spread.
With Brinker trading at around 154.39, I’m going to buy the August 15th $155 call and sell the $160 call.
That’ll cost me around $2.40, with a potential gain of $5 if Brinker moves toward the mean.
Trade #2: CAVA Group (CAVA)
Next up is CAVA — another restaurant, consumer-facing stock. Same setup on the chart, but this one actually dipped below two standard deviations from the mean. Love it.
I wanted to do a put credit spread here, but again, the pricing wasn’t to my liking.
So instead, I put together a call debit spread looking for a move back toward the mean.
With the August 15th expiration, I’m buying the $84 call and selling the $86 call.
Cost is just over a dollar, with a $2 max gain if Kava reverts.
Trade #3: Lumentum Holdings (LITE)
Finally, Lumentum — ticker LITE. This one’s different in that it’s soared through two standard deviations above the mean.
I was looking at doing a call credit spread here, but again, the risk/reward on the options didn’t work for me.
So I’m doing a put debit spread — buying the $120 put and selling the $115 put, again August 15th expiration.
That’ll cost around $2.40 for a potential $5 gain if it pulls back toward the mean.
Wrapping Up
So there you have it — three Mean Reversion Cash Machine trades today.
Mixing it up a bit with three debit spreads: two on the call side, one on the put side.
This is JD for the Rational Trader — thanks for joining me.
Click here to join my FREE Telegram channel and give me a thumbs up if you found this helpful.
I’ll be back tomorrow with more Mean Reversion Cash Machine action.
Talk soon,
JD
The Rational Trader
