The “2 Sigma” setup that turns calm into cash
Hello everybody. JD here with the Rational Trader Market Analysis Daily.
In today’s video, we’re going back to our credit spreads for the mean reversion cash machine.
Yesterday we took a detour into some debit spreads — a mixed bag, with CAVA and Lumentum (LITE) not working out, but Brinker (EAT) giving us what we needed for a profitable trade right at the open.
Back in the Sweet Spot
Moving on to today, I’ve got two trades that are right in the sweet spot. Looking at this earnings season so far, the highest batting average has been on call credit spreads.
That makes sense — we’re trading at a market peak where further gains are harder to find, especially when a stock is sitting at two standard deviations above its mean.
Trade #1: Cisco
First up is Cisco. The stock’s down almost 1% today, but before that, it had been bouncing along at Two Sigma. When that happens, the Two Sigma line moves even higher.
Right now, Cisco’s about 70 cents below two standard deviations above the mean. The trade is a call credit spread using August 15th expiry — sell the $74 call, buy the $77 call for insurance. Net credit is around $0.45.
Trade #2: Tapestry
Next is Tapestry, ticker TPR. Same setup — another stock trading at two standard deviations above the mean. It’s an overbought market, and Tapestry reports earnings tomorrow morning.
Here, I’m selling the $122 call and buying the $126 call as insurance. That nets about $0.40.
The Wrap
Two trades today — call credit spreads on Cisco and Tapestry. Based on our stats for this quarter, both should be ringing the cash register in tomorrow’s regular session.
That’s all for today, folks. This is JD. I’ll be back tomorrow with another video. Take care, have a great day, and we’ll see you then.
Talk soon,
JD
The Rational Trader
