Options Trading Newsletter - Issue #141 Only Up & Never Down... [Options Today - Double Butterfly on SPY ]
Only Up & Never Down.. [Options Today - Double Butterfly on SPY]
Only Up & Never DOwn… [Options Today - Double Butterfly on SPY ]
What goes up and never down? It’s for sure not the stock market…
If you have not got it? Let’s break the news to you….It’s nothing but your age…That’s one thing which just gets bigger and up and never down…something you cant control.
If you put it into perspective our phases of life is no different from the stock market as we go through several phases. Each stage of our lives can be likened to a phase in the stock cycle, each with its unique challenges and opportunities.
Accumulation - This phase is like our early years of our careers. We get ourselves engrossed in work life, laying the foundation for future financial stability. We learn, grow and keep up with life expenses while we start saving up for the future.
Markup - As we move into a more stable period of our lives, our focus shift to investment. This is the time when our money begins to work for us, be it in stocks, property or other assets. At this stage, we are still able to take higher risk, especially during the initial start as we want to grow our wealth faster, but as it accumulates, we start to have strategic allocations to our investments or assets.
Distribution - This is the phase where we become more conservative, prioritising in wealth preservation over excessive risk taking. We are trying to secure what we built, but at same time ensuring that it still gives us stable cash flows and moderate growth. We would reorganise our portfolios, moving into safer, income generating assets Phase where we start to become more conservative in wealth preservation and planning for retirement needs.
Markdown - Our active income generation capability stops while we rely on passive income from our accumulated wealth. This phase underscores the importance of earlier planning. It’s time to enjoy the fruits of our labour, but also to be mindful that they last for our remaining years. If there are any left, then our estate would continue to enjoy them on behalf of us after we pass.
It's vital to recognize which phase you're in and to act accordingly. Missing a phase or mismanaging it can have long-term consequences. Unlike the stock market, we can't reverse time. If we miss capitalizing on our 'golden years' of financial growth, it's challenging to catch up later.
In conclusion, segmenting our life into these four financial phases and approaching each with the right strategy is not just wise; it's essential. It's about making timely, informed decisions that align with our changing needs and goals. Remember, just as in the stock market, timing and strategy in life are everything.
"Fortune favors the brave." – Virgil
SPX (4559)
SPX continue to defy gravity and inched up 1% (45 points) last week. Can it break the July high which is another 1% from current levels? As much as it wants' it depends really if the market wants to create history by going back to many of its previous highs above before year end, first being the July’s high.
Next week, is not much of economic news until Thursday, where Core PCE Price Index and unemployment claims will be released. Although, the SPX looks extended on the daily chart and there is possibility of a short term retracement before it can move higher up. Last week we say TNX (10 Year Treasury Yield) bounced off a support level at 4.365 after filling off a price gap. Further on Friday, it further opened gapped up (possibly also due to low liquidity due to the holidays). Whatever, the case is, a higher interest rate is not good for the market, and we need to watch the levels of TNX as SPX moves in the inverse direction with TNX.
We are watching still the levels of 4425 to 4460 in case SPX reverse, this would be the likely area it lands first. On the upside, 4607 as the next level of resistance. Last week, it filled the upper gap of 4550-4567.
Trade range for the week is 4400 to 4600.
NDX (15982)
NDX is up about 1% also for the week. It closed the week above previous high in July and already broken the downtrend pattern since from July. It breached the two lower high points and now testing July resistance. There is a probability for it to retrace to the September lower high at 15600 level (also the area of gap from the CPI print 2 weeks earlier).
We can also see from the Squeeze Meter that the momentum histogram has peaked and the colour has changed to darker blue indicating a possible price drop in NDX.
Lets see if NDX can continue the last week of November in green or end in a red week before going into December.
Trading range for the week is between 15500 to 16200.
HANG SENG INDEX (17559)
Any bounce in HSI is sold down hard. The market does not give any opportunity for HSI to break the downtrend like the US market. If it breaks below 17500, it could potentially go down to the next level of 17,130.
The lower support now at 17000 and resistance at 18000.
OPTIONS TODAY [Double Butterfly on SPY]
Since we are in it, we can try more butterfly long shot deals. Instead of 1 butterfly, we can set up multiple butterfly to broaden our net to catch one.
Put Butterfly Setup (1 Dec)
Sell two Put at $450 (highest open interest, close to 1 SD)
Buy 1 put of $2 width, $452 and $448 strike
Total Debit $0.16
Max Profit $1.82 (11x)
Call Butterfly Setup ($1 Dec)
Sell two Call at $460 (highest open interest, close to 1 SD)
Buy 1 Call of $2 width, $462 and $458 strike
Total Debit $0.26
Max profit $1.74 (7x)
Trade Management
No real trade management if prices goes OTM either side. If price is ITM either one or 2 legs, means that you are within the net or price range. Monitor the trade closely and park a GTC order for exit. Remember to close the trade as you might be ITM one leg and get assigned. If assigned you will take on market risk of the asisgned shares when market open next week.
OPTIONS TODAY [Butterfly on QQQ]
The market went sideways and was holding the 388 level. We took a full loss on this trade. As it is a low cost low probability trade, we would not say it was out of our expectation.
In another Butterfly trade on NVDA, our fate was not as bad as we hit 15x return on that one. We were bearish on NVDA and put in a bearish butterfly trade before earnings with the middle strike at 480 $5 width both side. We only paid $0.20 for it. NVDA closed on Friday at $477.76 within the profit zone.
We made $3.05 for this trade which is a 15x return. One losing butterfly trade at $0.10 and one winning trade on NVDA at $3.05, which means we can cover many losing trades with one win. Although, its a guessing game of where the price will land, by using proper data sets, we could make higher probability trades to increase our chances. We went through the steps to do this in the last 2 butterfly we did, ie.
Use Expected Move as a gauge to place your short strikes
Use the highest open interest strike as another gauge to place your short strike
If both prices coincide, the better the trade chances.
Reminder
If you are using Tastyworks, please remember that Tastyworks will send a reminder email asking if you are monitoring your expiring options. If you do not respond to confirm that you are monitoring, their risk team may close your positions for you, if they fee that there is risk of assignment.
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
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