Options Trading Newsletter - Crisis to Rejoice- Issue #148 [Options Today - Poor Man's Covered Call on XLU]
Crisis to Rejoice...
Crisis to Rejoice…
As the sun rose on January 1, 2024, Japan, the land of the rising sun, was met not with the usual tranquil beginnings of a new year, but with the earth shaking beneath its feet. A powerful magnitude 7.6 earthquake struck, leaving in its wake a trail of destruction. Homes crumbled, lives were tragically lost, and a nation known for its resilience was once again put to the test. In Japan, where Shōgatsu – the New Year – is a time of celebration and hope, this was a somber and devastating start.
Yet, amidst this landscape of despair, an unexpected emerged. Just a week following the quake, Japan's stock market, the Nikkei Index, soared to unprecedented heights, surpassing its previous peak of 33,753 set in March 1990. This financial milestone was more than just a number; it symbolized a stark contrast within the nation – while some parts of the country were still grappling with loss and recovery, others were reveling in economic triumph.
This contrasting events presents a profound reflection on the human condition and societal responses. It begs the question of how we, as a collective, navigate through the complexities of shared grief and individual prosperity. Is it possible to find a balance between empathy for those who suffer and celebration for those who succeed?
The earthquake and its aftermath remind us of our vulnerability and the impermanence of life. In contrast, the soaring Nikkei Index is a testament to human resilience and the potential for growth even in the toughest of times as Japan suffered deflation for decades. However, these two extremes also highlight the uneven distribution of fortune and misfortune. It raises the moral quandary of deriving joy in the midst of others' sorrow.
In a situation where economic success is contrasted against a natural disaster, those who have benefitted could consider extending a helping hand to those impacted by the earthquake. The rebuilding of homes and livelihoods, supported by those who have gained from the market's success, could serve as a powerful symbol of unity and shared humanity.
In conclusion, Japan's contrasting start to 2024 serves as a reminder that joy and sorrow often coexist. It challenges us to find a balance – to celebrate our successes while remaining mindful of others' struggles. As we navigate through our own lives, let us remember that sharing our happiness and shouldering each other's pain, in whatever small ways we can, makes us not just a successful society, but a compassionate one.
"When you get, give. When you learn, teach." - Maya Angelou
SPX (4783)
SPX closed off the week in green again as buying momentum continued strong on stocks which has sold off in the past weeks, save for TSLA. SPX is up around 1.8% for the week.
After the CPI release which was higher than expected 3.4% versus 3.2%, SPX sold off initially but later regained most of the losses. On Friday, it seems to be testing again the resistance level of around 4800. The financial sector was mostly red for the week after the start of the earnings season with bank releases on Friday.
Market is trending sideways for the past 3 weeks trying to find reasons to continue the bullish move up. Corporate earnings would be a catalyst of where the market can trend now as the earnings season kicks off now.
Monday is an exchange holiday and from Tuesday onwards, we could see more bank and financial companies releases coming throughout the week.
As this is a short trading week, market could continue sideways, great for the SPY Iron Condor which we were in coming to expiry end of the month.
Retail sales kicks in on Wednesday and Unemployment Claims on Thursday.
Trading range for the week is 4700 to 4850.
NDX (16832)
NDX regained 3.2% for the week only after one break in red after the 9 weeks rally. Although CPI rose slightly against forecast, the subsequent release in PPI was below forecast indicating prices at the producers level is not increasing more than expected.
In any case, we still see some headwinds above the current level. As this week is a short trading week, market may trend sideways until more catalyst comes through on big tech earnings.
Nasdaq futures, can’t seem to stay above 17,000 level for long also indicating a significant level to break.
MSFT, AAPL, GOOGL, AMZN, META, NFLX all posted positive for the week. Market is still strong on the buyside despite some fears of top and profit selling since the market opened in 2024.
Trading range for the week is between 16500 to 17200.
HANG SENG INDEX (16244)
NDX found support at 16,000 level. As is, we still see upside potential for long at these levels. Next level up is now at 16,800 level.
OPTIONS TODAY - TRADE STATUS ON SPY IRON CONDOR
The trade is at 60% profit now.
OPTIONS TODAY - TRADE STATUS ON MICRO CRUDE OIL FUTURES IRON CONDOR
Our trade filled at $0.93 and currently trades at $0.81.
The price range is $65.75 at the lower side and $78.75 on the upper side. The crude oil futures is still trading within the December price range and both the December upper and lower range is within our short strike levels. The trade is working well for now as any significant movement up or down has been snapping back to mean. As you can see the price bar for January is at the center of the tops and bottoms. We have been making off some good trades on Micro Futured (MCL) selling the tops or buying the bottoms.
OPTIONS TODAY - POOR MAN’S COVERED CALL ON XLU
Utilities sector has been on a downtrend since the rate hikes have started in 2022. Utilities which are heavy on investments would be sensitive to high interest rate environment. But since October last year, when the expectation that the rate hike regime would end in 2024, the utilities sector together with interest sensitive sectors such as Technology are making a comeback, which is seen in the utilities ETF- XLU which have risen about 16% since.
Last week it had a small pullback which gives us an opportunity to enter into an income trade using the Poor Man’s Covered Call strategy. This strategy involves buying an ITM longer duration call and selling short term calls at slightly out of money strikes to generate premiums. Sometimes we call this strategy lease to rent strategy like you renting a house long term and then leasing it out for monthly/weekly rental income. Kind of like an ABNB business, just that you don’t even need to own the house. Alternative to this strategy would be a covered call, ie. just buy 100 shares and sell OTM calls, this is for bigger accounts with deeper pockets as it uses more buying power.
Trade Structure
XLU is trading at $63.31.
Buy the January 25 Call at strike 60 (Delta 64) for around $6.95-$7.00.
Sell the February 16 Call at strike 65 (Delta 32) for around $0.63.
Net debit paid is $6.32.
(Adjust according to price on opening on Tuesday)
Risk Profile
Break Even Range on Expiry 16 February, $62.69-72.24. As long as price is between these levels till February 16, we will make money on the trade. But as our intention is to generate income through this strategy, we need to do some work to continuously manage the trade.
Objective - Rental Income.
Rental of the Asset (ie. Call) - $695 [Value of the ITM long dated call, 25 Jan 2025]
1st month lease income $63 [Premium earned from the short dated call, 16 February 2024]
Rental Yield - 9% for 33 days. [63 / 700]
Closer to expiry of the short call, roll the short call for another month rental income. You can choose the OTM strike price that generates similar premium of around $60 per month. You can do this at 9-10 months at least. Generating income of say 60x10 = $600. And at the end of the 10th month, you can also realise some value on the Long Call. Assuming even if XLU stock price did not move since trade entry, at around 10 months the call would still be worth around $5.00. Total income/profit generated would be:-
Income from OTM short calls - $600
Loss on Long Call - $200
Investment return = $400 over initial entry paid of $700 would be 57%, over 10 months.
Trade Management
Obviously, 57% return over 10 months seems nice but this is of course made with the above assumptions. Price can go up and down during the duration of the trade and at certain times, we need to take different action.
When price goes up.
Scenario 1 - up but below short call strike price on short call expiry. Roll the strike up another month for additional premium.
Scenario 2 - up and pass the short call strike on expiry. When price action is strongly up, you may need to monitor the trade closely, to roll the short call before it goes ITM provided that there is little time left to the expiry, 1 week plus or when you see that price may likely breach your short strike and not comeback down till expiry. Rolling at same strike before getting ITM would likely be done at a credit, albeit a small credit of $0.05-$0.10. Possibility to roll at higher strike at times to give leeway for the stock price to go up.
When price goes down
Scenario 1 - price goes down but still above long call strike (ie. above $60). Continue to roll for premium, but the rolling strike price may need to be lowered to get the same premium.
Scenario 2 - price goes down lower than long call strike of $60. Lowest rolling price is at $60, do not roll lower than $60. Close the trade if loss is at 30%-40% of the of the initial entry cost. To calculate the trade loss is closing price plus all premium earned in past less initial entry cost. Set your cut loss level upon entry so you know when to cut loss. As good as a strategy is, there is never a sure win strategy.
This strategy works well if the stock is slowly trending up or moving sideways. If volatility kicks in, it requires many decisions and adjustments and if you are not familiar or used to it, then better go for more straightforward option strategies.
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