Omicron fears continue to dominate the headlines. Stocks are slipping in early trading Monday, and buyers are nowhere to be found. If the sea of red wasn’t evidence enough of the turmoil, the CBOE Volatility Index (CBOEINDEX:VIX) is rocketing higher by over 20% this morning. With such an ominous backdrop, you know we have to bet with bears for this week’s top stock trades.
Optimists will point to the looming Christmas holiday as a reason for hope, but Santa Claus doesn’t have a 100% track record of delivering for the good little boys and girls on Wall Street. Historically, when he doesn’t show, things turn nasty. We must let the chart be our guide for now, and it’s not looking good.
Every major index is now below the 50-day moving average, signaling bears now control the trend. If you think their reign continues, here are three top stock trades to consider this week.
The lot of them have broken charts, and lower prices beckon. So let’s take a closer look at each and map out a smart way to profit.
Top Stock Trades: Goldman Sachs (GS)
The financial sector is getting hit hard this morning, and it’s weighing on Goldman Sachs. The investment bank giant is cracking a significant support zone at $375 and the 200-day moving average. Volume is swelling as short-term traders abandon ship now. The next floor doesn’t come into play until $350, so consider that the next downside target.
This is the first time GS stock has been below the 200-day since last November, so the significance of the breach can’t be overstated. Implied volatility is rising sharply as demand for options balloons. Combine that with Goldman’s high share price and spread trades become a must.
The Trade: Sell the Jan $405/$410 call vertical for 70 cents.
Consider it a bet that we stay below $405 for the next month. You’re risking $4.30 to make 70 cents.
Best Buy (BBY)
The uptick in Covid-19 cases certainly isn’t helping the retail industry. And perhaps no company has seen a swifter reversal of fortune this quarter than Best Buy. Its share price was north of $140, heading into last month’s earnings report. Now it’s $95.
BBY stock is down another 5% in early morning trading after breaking the pivotal $100 level. In addition to the psychological significance, the century mark has provided support for over a year. Its failure speaks to just how aggressive the current downdraft is.
The next support zone sits around $90, so that’s the next stop. Put spreads offer a favorable risk-reward if you want to play.
The Trade: Buy the Jan $95/$90 put vertical for $1.90.
You’re risking $1.90 to make $3.10 if BBY stock falls to $90 by expiration.
Top Stock Trades: iShares Russell 2000 ETF (IWM)
When seeking top stock trades in a bearish environment, don’t overlook the simplicity of using a diversified exchange-traded fund like IWM. Correlations run together during downturns, so stock picking matters less than being on the right side of the trend. Small-caps have been hit hardest over the past month, making them the obvious target here. While the S&P 500 is still only 4.6% off its high, IWM is down 15%.
Smaller companies are more sensitive to the economy and interest rates. They’re also viewed as riskier and more volatile. When traders are de-risking portfolios, these are some of the first stocks to go.
With this morning’s 3% swoon, IWM is on the brink of breaking the lower-end of its one-year range. If it does, expect more selling to come.
The Trade: Buy the Jan $210/$200 put spread for $3.50.
The max loss is $3.50, and the max gain is $6.50.
On the date of publication, Tyler Craig was LONG IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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