A few weeks ago I told you about Jacobs Engineering and why I did not want to take a bearish trade on the stock. I am delighted to tell you the trade worked out, AND I am disapointed to tell you that the trade worked out. This week presents a similar situation, though I am much happier to suggest this trade. A good friend of mine works for Merrill Lynch (MER). The stock took a dive just recently and now looks like it has hit resistance and may move sideways for a while. While the chart shows the stock in an upward Wave 5, the Oscillator retraced far beyond the 140% retracement level, suggesting that the downward move showed so much strength that it could likely curtail a bullish recovery.
IV spiked up recently as MER was falling through the floor. A Calendar would not fare well in an IV Crush, and this IV chart looks primed for a crush. An Iron Condor, on the other hand, works very nicely in a Crush. The Instrument Panel shows the stock has a large range in which to roam before it would move outside of the profit zone. I prefer to exit before the stock hits the short strike price, so watch the mid-week and weekend edition for potential early exits if the stock begins to move against this position. Please also note that this trade has a very high probability of success. To get that high probability, one must give up higher reward and incur more risk in the form of potential loss.
