Tony Zhang "Constructively Bullish" in SPX & NDX, Offers NVDA Options Trade

SPEAKER_1 (0:00)

Do you want to welcome in our next guest, though, joining us, Tony Zhang, Chief Strategist over at Options Play. Tony, great to have you with us. Would love to get your macro thoughts before we dive into some of the example trades that you brought today. You've moved from selectively optimistic when we last talked to being more constructive, but you're not fully there yet. So what specifically has changed in the market to make you more bullish, and what are you going to need to get across the finish line?

Tony Zhang (0:27)

Yeah, thank you so much.

So essentially we have the S&P and the Nasdaq at near record highs if not just around there. But however, the rest of the market hasn't caught up to that move, and that's really why we've been selectively optimistic. The move has largely been incredibly narrow within select technology industries that have been leading the markets higher here. The rest of the market has really been left out of this rally. You see the equal weight S&P 500 index since the peak down around 7 percent, but over the last couple of days starting to recover some of that. So market breadth is starting to improve a little bit over the last few sessions, and that's part of why we are moving towards being more constructive. But if you look at the RRSP, the equal weight S&P 500 index, it's still just stabilizing. It hasn't quite yet started to outperform the market cap indices, and that's really what I'm looking for is that break out here above. Call it 213 on RRSP as a line in the sand that if we start to get above some of those levels while the S&P and the Nasdaq can hold on to those record highs, you have the S&P back above 7,800. Those are the levels that I'm really looking for the S&P to hold, and you have the Nasdaq 100 up around that 31,000 level. Those are the levels that I really want to see the market cap indices hold, and then if the rest of the markets can start playing a little bit of catch up here, that's really where we can get a lot more constructive. In the meantime, the biggest headwinds right now is still going to be interest rates. You have the 10-year yield back above 5.25%.

That's really going to be a major headwind here for the equity markets, and we'll have to monitor that closely. We do feel that the sell-off here in treasuries is getting a little bit overdone. It's certainly a crowded short treasuries trade right now that has the potential of seeing a bit of a short squeeze. If we do have all of those things in conjunction with each other, this could be a setup where equity markets can move higher, but we really need to see the rest of the markets start participating on this rally.

SPEAKER_1 (2:39)

Alright, so then let's dive in to the trades that you've brought today because one of them is certainly one that moves the market any time it moves just based on its sheer size. You've got Nvidia as your first play today. So how would you look to trade Nvidia for example purposes, Tony?

Tony Zhang (2:54)

Yeah, so Nvidia recently broke out above that 230 level, which has been an important resistance level for many months now. It's been trading between 210 and call it 235 and recently just broke out here. And what's interesting is we broke, as we broke out here, implied volatility on the options are incredibly cheap or under five percent range in terms of how inexpensive options have been over the past year. So I think this is an opportunity to actually buy some upside using a call spread. And I'm going out to the December expiration. I'm looking at buying the 235, 270 call spread earlier today you can pay about $12.40 for that debit spread. And what that's buying you is the upside potential into our upside 270 target, which is essentially a measured move of the trading range that it's been in over the last few months, projected out above that breakout level here into that 270 level. That's our upside target for end of year. And this call spread allows you to potentially take advantage of that move here to the upside while paying roughly less than 1% of the stock's value in this particular case, risking less than 1% of that stock value, giving you about a 2 to 1 risk to reward ratio, if Nvidia can get back to that 270 level by the December end of year expiration.

SPEAKER_1 (4:19)

And Tony, another thing that caught my attention was the implied volatility rank for Nvidia. It's just 4 out of 100 How important is cheap options volatility to your decision to use a call spread right now?