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3 Clever Ways to Buy the Dip with Options

stocks to buy - 3 Clever Ways to Buy the Dip with Options

Source: Shutterstock

Thursday’s destruction was widespread, causing indiscriminate selling across the entire market. It reeked of mass liquidation and, quite honestly, capitulation. So says the CBOE Volatility Index (CBOEINDEX:VIX), which surged past 30 to signal panic was in the air. Previous episodes like this have created opportunities for those with the wit and will to put money to work. Today, I’ll share my three favorite stocks to buy.

Because there’s always the chance for aftershocks, we’re going to use high probability options strategies that offer a wide range of profit. In other words, they have plenty of margin for error in case the sell-fest snowballs. The silver lining to this week’s ruckus is that implied volatility is now elevated, and options premiums are pumped.

When you combine this with the oversold conditions that some stocks find themselves in, it makes the strategy we’re using today mighty attractive.

Here are the tickers I’m targeting:

  • S&P 500 ETF Trust (NYSEARCA:SPY)
  • Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)
  • Carnival Corp (NYSE:CCL)

Let’s take a closer look at each chart.

3 Stocks to Buy Using Options: S&P 500 ETF (SPY)

S&P 500 ETF (SPY) with bull retracement pattern
Source: The thinkorswim® platform from TD Ameritrade
keyboard featuring a bull on the etf key
Source: Shutterstock

Rather than fuss with individual stock picks, the simplest route is to bet on the entire market with SPY. I prefer it to the Nasdaq ETF because SPY didn’t get hit as hard. As a result, its uptrend is still intact. Thursday’s drop carried it to but not beyond the rising 50-day moving average. The last pullback in late-January saw buyers swarm to defend this level, and I think we could see something similar.

Even if we probe below it, the longer-term bull trend and positive sentiment surrounding stocks into this year demand buying this dip. It’s not a matter of if, but when. In fine-tuning the entry, I suggest waiting for SPY to rise above a prior day’s high to signal a pivot low has formed. This morning’s gap higher was summarily rejected, so we need to see more evidence before pulling the trigger.

The Trade: Sell the March $355/$350 bull put for around 55 cents.

Consider this a bet that SPY can stay above $355 for the next 21 days.

Oil & Gas (XOP)

Oil & Gas ETF (XOP) with bull retracement
Source: The thinkorswim® platform from TD Ameritrade
a one-hundred dollar bill with an oil field in the foreground and a red arrow pointing downward
Source: Shutterstock

From a sector perspective, is there anything more beautiful than the uptrend in energy stocks? OK, perhaps financials. But, today, I’m going with the oil angle. Crude oil has been a juggernaut rising on the twin hopes of global growth and inflation’s return. This week’s ruckus didn’t put a dent in its daily trend.

The same can be said about oil stocks. They entered this week at highs, and all the selling has done is deliver a garden variety two-bar pullback. If you’re going to buy the dip, why not do it in a sector that escaped the drama with flying colors? XOP is my favorite fund to play the space. As I type, it’s already roaring back from Friday’s lows.

Bull puts have been easy money for months now, so I’m sticking with it as my strategy pick.

The Trade: Sell the April $70/$65 bull put for $1.00 credit.

Carnival Corp (CCL)

Carnival Corp (CCL) with fresh breakout and free air above.
Source: The thinkorswim® platform from TD Ameritrade
Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

The final of our stocks to buy is Carnival Corp. The cruise line operator heard you missed its epic breakout earlier in the week, and it decided to provide a second chance. As shown in the accompanying chart, the breakout over $24 was a big deal. It ended the months of bottoming action seen since March and signaled the weekly and daily trends are moving higher. There isn’t anything but clean air above until $40, giving ample upside for prices to ramp.

I like just about any bullish trade here, but let’s go with a call vertical to mix things up.

The Trade: Buy the May $25/$30 bull call vertical for $1.90.

On the date of publication, Tyler Craig held LONG positions in SPY and CCL.

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