Options Trading Newsletter - Issue #87
LOSING $16 BILLION...
LOSING $16 BILLION...
That's a lot of fortune to lose in a week. This was exactly what happened to Sam Bankman Fried (SBF) the owner of FTX Crypto Exchange. Lost his fortune and filed for Chapter 11 bankruptcy protection as his Crypto Empire collapsed. SBFs peak time net worth was at $26 billion and he lost it all at age 30. Some entrepreneurs spend a lifetime amassing $1 billion and in the Crypto world, age was never an issue.
Whether it is greed, a mistake or stupidity, it does not matter as it is gone now. Not only that, a lot of people also suffered and has money stuck now in FTX due to the bankruptcy. One of the important things if you would like to get into Crypto is these Exchanges look like banks but in fact they are not. There have already been many past cases of CEX going bust like Mount Gox (2010) and Quadriga CX (2019). So the key thing is keep minimal crypto if there on your long term holdings and transfer the assets into a cold wallet like Ledger. "Not your key not your cryptos".
The other issues that always spirals are Crypto lenders which tend to go bust often because they often give high returns to customers in return for staking their cryptos. Voyager & Celsius are other recent cases, so do understand what you are giving up in exchange for juicy rates. At the end, these companies need to make back the high rates given up and they of course high return deals, like lending back to hedge funds, like Three Arrows which eventually went bust... Money make money, but remember when they lose it, it's not their money buy yours... So be careful of such kind of schemes.
If you are affected or have been affected by such things, it's just lack of education I would say because such things are not new. The crypto space is extremely volatile and you can make a lot yet you can lose everything or more... Continue to keep yourself on top of trends and how to manage risk, stay on the right track and get into a community so you can ask questions and continue learning. There are many around but some of our education friends started one, hop on our Telegram Community... here.
SPX - 3992
CPI gave a big boost to the market and the market was up 5.9% (222 points) for the week. It breezed through 2 key resistance 3800 and 3900 on a strong rally post CPI announcement and followed through the following day.
CPI for October was at 7.7% against forecast 7.9% which means the deceleration of inflation comes out faster than expected, which is good for the stock market as inflation is the top enemy of the Feds. As you can see, inflation peaked at 9.1% in August 22 and continually came down monthly to 7.7% at last report. That is what the Fed would like to see and would likely cause it to slow down the level of rate hike at the next meeting in December 14. The unemployment claim also increased slightly which is a second factor which the Fed monitors for decisions on the rate hikes. With the mass layoffs of the corporate giants announced and implemented, we would likely see higher claims in the next reporting. Latest, even Facebook could not withstand the harsh punishment of the market for not growing its business and finally implemented its cost measures by laying off 11,000 employees.
We have rallied from the bottom (3491) since 13 October and that's about 15% up from lows. We are now sitting at 61.8% Fibonacci from previous June rally, so expect some resistance and profit taking at this level. If we surge pass this, the next level of resistance would be the daily 200 MA which would be around 4100.
This week, there is going to be many Fed members speaking each day and Wednesday is retail sales data. This week's trading range is 3800 to 4175.
NDX - 11817
NDX nicely closed back above weekly 200 MA this week up by 8.8% (959 points). It has been long since we saw such bullish moves and the little light that CPI data gave really shown out of the tunnel giving hope to the market that the rate hikes would finally end beginning 1st quarter 2023. Recall that was what brought down all the NDX component stocks as the end of the zero rate regime beginning this year put all these stocks into the ground. So it won't be surprising that the halt of rate hike would bring them up to the sky again but probably at a lower rate due to the slower economy which have to walk back up themselves. The last round of Covid crash, the Fed pumped free money into the economy but not this time so it will be a slower recovery up. Nevertheless, there will be some desperate pump-up and FOMO buys as we have seen in past few days. So still be vigilant if you are buying in now.
We took some positions already on AAPL, AMZN and GOOGL as we spoke on the topic of tranching into good stocks at last week's traders talk. Although, we did not have the opportunity to buy 2-4th tranche for now, the 1st tranche is taking good profit on the upswing and if it continues will bring in good returns.
NDX daily chart shows a nice "W" double bottom pattern and price breaching above the W neckline. If it retraces back a bit, it could still be a good buyin position waiting for the next wave up to 12,500 level.
Watch for levels of 12,500 up and daily support above 50 MA at around 11,500. Expect this week's range to be at 11100 to 12500.
CAUTIOUSLY BULLISH... (COLLAR STOCK)
Yes the market rallied strong last week and we see for first time for the year almost double digit increase in our portfolio, a happy sight indeed. Then the question now is always, should I buy more or should I wait longer? Well, there can only be 2 outcomes:-
#1 Market rallies and leave you behind. That's why we say during bear markets, you can't time the bottom and would need to be ready to tranche in when valuation is at reasonable levels.
#2 Just a Bear Market rally and prices retraces back or may even go lower.
If we did not buy in earlier, I would not likely want to chase the prices for now for long term buyin. I would wait for a retracement and may take positions then.
However, if I am trading, I would not mind to wear a mixed hat between long term investing and trading to enter into quasi investing and trading structures. ie. using option structures together with equity.
This week, I introduce you guys to another new option structure called Collar Stock. It's like putting a leash on your stock both ways, up and down.
Directional Assumption
Cautiously bullish. We invest in 100 shares at current market price and use proceeds from selling an OTM short call to buy a put protection in case price reverses, but this will cap the upside. We keep this structure as long as we need the downside protection. When there is a confirmed or more certain bullish momentum, we can remove the put hedge and uplift the short call collar on or near expiry, leaving behind pure 100 stock.
Trade Set-up
Buy 100 stock
Sell an OTM Call (at resistance level preferably)
Buy a PUT using the proceeds of the short call
Duration - 14 to 30 days depending on duration of how long we are cautiously bullish.
Risk Profile
Below an example of risk profile for a Collar Stock on GOOGL for net $96.10.
Buy 100 shares @ $96.20 (current market price)
Sell Call @ strike 105 at $1.07
Buy put @ strike 86 at $0.97
If share price move above current price, we gain but gains would be capped at $890 (short call strike $105-trade price $96.10) if share price is above $105 on expiry, due to the short call.
If share price drops below current price, we will lose on the trade but the max loss would be $1010 due to the put at strike $86 (trade price 96.10- put strike 86).
Pros/Cons
Such option structures just keeps the trade within certain volatility limit ie. within the range of short call strike and put strike. If that is what you are looking for as it is more suitable when upward run of stock is uncertain and you would like to enter the trade now rather than later as you are afraid the stock price would run up, at the same time having an insurance on the downside with the put. It's only workable if you wanted to buy 100 shares in the first place.
Nevertheless, should the stock price runs up higher and faster than expected, you will end up with with another problem, ie. capping of upside profits or possible adjustments on rolling short call higher, like a covered call scenario and possibly dropping the put insurance on the next rolling.
Should the stock price comes down to the put strike till expiry, then you would have protection up to the put strike (86) and in similar situation on loss on holding 100 shares (96.20-86). If it goes below, you will just benefit by having unrealised loss on shares capped till put strike. Deciding to continue to roll the collars would be more complicated in this situation because of the short call strike would only be possible at lower strikes hence further lowering the put protection strike and increasing the max loss of the trade/investment.
So rather than coming to decide on a max loss situation, we should have a stop loss scenario even before trade entry and exit the trade earlier if the expected bullish run did not happen and stock price goes down from entry instead. We would lose less with a Collar Stock Structure as compared to purely entering the trade by buying shares.
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DISCLOSURES
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
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.