Options Trading Newsletter - Issue #187 - Options Today - Jade Lizard on TLT - ES New ATH...
ES New ATH...
ES New ATH…
Everyone who was bearish on the CPI news of sticky inflation was caught and squeezed like a lemon. The market does not need to act rationally and however confident we are with any signals or technicals, things can also go south. For the moment, we are not putting on any new longs on the US Market and just waiting for a pullback to see new opportunities arises. Let the Bulls celebrate for now…
As for China, it is now in a better position for new longs after the pullback from the parabolic move. Eventhough, not much details are given on the stimulus plan and the market is now a bit skeptical we see the valuations are much reasonable compared to the now ATH S&P market. Rather than any specific China counters, we are just working on the HSI futures.
ES (5859)
ES is up 59 points and yet created new highs at 5868. We still see it to hit resistance at the upward sloping line, possibly to 5900 levels.
The CPI data came in with sticky inflation and the jobs data not too well too, but the market shook it off after some selling action and went higher. It all seems too odd to us and we are not placing our bets on the bulls.
The support at 5721 held up last week and it should continue to hold.
The momentum turned back strong, but it looks like a temporary short squeeze. The Barchart indicators are all firing strong buy still, so it’s also not a good idea to short it as potentially can be more short squeeze situation with most still bullish.
Trading range for the week is 5750 to 5900.
NQ (20450)
NQ is still ranging in the green box (20000-20600) and has closed near the upper level last week. So far, we see selloffs are always bought back in the past 2 weeks but we could see a different situation as it reaches its high. As we saw when it last topped, it followed on with 3 weeks of selling. We would be cautious at these levels.
Trading range for the week is between 20000 to 20850.
Earnings season has started with banks starting off the season. ASML, TSMC, NFLX and AMEX would be key earnings announcement for the week.
HANG SENG INDEX (21251)
HSI fell over 6% last week sending some late comers running for cover and the worst of them would probably get whipsawed as the top and low range for the week was 13%. As we said last week, such kind of parabolic price action does not last long and a matter of time it gives back the gains. We could see HSI to trade above 20,000 levels as market awaits for more concrete economic plans coming out of the China government. As for now, the market continue to remain bullish and even more, liquidity in the market is expected to be high as Chinese brokerages and banks lends out more for stock purchases.
Pullbacks nearer to 20,000 levels, can be accumulated for longer term play.
OPTIONS TODAY - JADE LIZZARD ON TLT
Just when everyone thought that interest rate would come down in September and bonds prices would go higher, TLT the 20 Years Treasury Bond sold off after the 50 bps rate cut in September. It fell from the high of $101.64 to $93.70. With the recent CPI announcement, it fell even further. It is now at the lower end of the RSI and there is possibility that it might stabilise and move sideways a bit before any significant movement back up. In view of this, we do a trade using Jade Lizard strategy that has no risk on upside and limited risk on downside considering price action that it has already went down by 8% from the highs in September. Further TLT has a good IVR of 61 which make sense for a short premium strategy.
Trade Structure (DTE Nov 15)
Jade Lizard comprise a Credit Bear Call Spread and a naked short put.
Sell a Bear Call Spread - $1 wide. Sell $95 and buy $96 with a credit of $0.38.
Sell a short put that is no less than the Max Loss of the Bear Call Spread, which is $1.00-$0.38 = $0.62. If we scroll on to the put option chain, we get a premium of $0.64 with short put strike $89. The premium received is higher than the max loss of Bear Call Spread of $0.62. However, as TLT has already gone down by 8%, we can choose a higher strike of $90 to get more premium for the short put, ie. $0.84.
Total credit received for the Jade Lizard is $1.22. Max loss is $8867 if TLT goes down to zero, but not likely to happen till 15 November. In case, TLT goes ITM on the short put, we can get assigned and keep a long position on TLT as on an interest rate cut environment, bonds would tend to increase in price. If we don’t get assigned, we can also roll it for more premium and wait for price to go above the strike price of $90.
If TLT go above $96, we still get to keep a net premium of $22 on expiry. There is no risk to the upside.
Max profit if TLT stays between $90 and $95 is $122.
(adjust strike price on open, with the same trade structuring)
Trade Management
If trade goes ITM on the short put, get assigned and manage a stock position and do a covered call until price goes back above $90. Only Sell Covered Call at prices $90 and above. If price drops below $90 and not possible to do covered call, just sell the stock and sell short put to get premiums. If no assignment before expiry, roll the short put in time for premium at strike $90.
If prices goes ITM on the call side, no action is required as there is no risk on the upside.
You can also take profit, when 50% of the premium is received, if you decide so. For us, we will just let it play out and manage the trade if it goes ITM on the short side as we intend to go long TLT.
OPTIONS TODAY - UPDATE IMBALANCE IRON CONDOR NVDA
+$10 for the week closing at $134.80. The upper side of the trade is ITM but there is 2 levels of resistance to break ahead, 1st nearer level $136.15 and second all time high at $140.76. The trade is in a loss of $163 but if it keeps going higher, we will close off the lower side of the Bull Put Spread. We put in a GTC order at $0.05.
OPTIONS TODAY - UPDATE ON NEUTRAL IRON CONDOR SPY
The new all time high is not doing good for the trade as it gets deeper ITM for the upper side of the trade, in fact $10 ITM on the short call of $570. As the trade comes into expiry this week, we will need to see a big sell off in SPY to make a comeback. But likely, this will not be a winner this round unless the mega selloff happens this week. Let’s see if we are in luck for a turnaround.
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