Options Trading Newsletter - Issue #97
Reunion...
Reunion…
Happy Chinese New Year to all…
When I was a kid, I used to look forward to Chinese New Year, as that is the day when we get to travel for the holidays back to our grandparent’s hometown. At the same time, we get to meet our entire enlarged family, and I would say it is very large as my grandparents have 9 children and imagine the multiplication effect.
As kids, we will enjoy our time playing, cycling around the neighbourhood and play firecrackers bombing and shooting each other. It is a real carefree time as kids.
The pre-Chinese New Year night, is where we would do our “Reunion” dinner. “Reunion” because every siblings will reunite at their parents (my grandparents) house and celebrate with a feast. Some will travel hundreds of kilometers just for this event and you can imagine what that causes to traffic. This event is even bigger in China and it is coined “the largest human migration event in the world”. It is really a time to rekindle and share happy moments.
We just had our “Reunion” few days back and it was a great event for us and also for our kids. Festivities are always nice to spend together with the family, wishing everyone a Happy Chinese New Year and may the year of Rabbit brings everyone good health, wealth and prosperity.
SPX (3972)
SPX was rather red whole of last week and made a comeback on Friday, up 73 points. As it tried to retest the trend line. Earnings so far has been mixed, JP Morgan did good while Goldman Sachs had huge miss. More earnings would come in this week, lets see where these goes.
There might be likelihood that SPX might hit the trendline resistance next week and fall like a baby once again as it did most of last week. As the market closed last Friday, the tape action of the VIX was pretty weird. The market moved out of the sideway action and rallied slightly pass 3 hours before close, VIX’s movement was not in sync. Instead of going down, which I was waiting for it to run down below 19, it followed suit to rally up instead. Sensing some fear starting to crepe up during a rally, I placed some hedges on SDS(ProShares Ultrashort S&P500) just before close. At the same time, also took on the Bull Call Spread on VIX which we spoke of at the last Traders Talk and Quick Bites issue.
This week’s earning watchlist:-
Market is closed on Monday. The trading range for the week is between 3900 and 4050.
NDX (11619)
Similarly, NDX had a strong rally on Friday, up 323 (2.8%). Days before it was taking a beating. After this one big move, we expect NDX to hover around 11400 and 12000 until the next impetus on 1 Feb where the next Fed Rate hike announcement will come. There was already 3 rounds where NDX could not get past and stay above 12000 level.
There are several big earnings this week, MSFT on Tuesday AMC, TSLA, IBM & LRCX Wednesday AMC, V andr INTC Thursday AMC.
The trading range for the week is between 11500 and 11900.
BULL CALL SPREAD
This is a directional strategy, where we:-
Buy an ATM call
Sell an OTM call at a higher strike
Both with same DTE
Few things which we need to note when executing this strategy.
#1 We need to be upward directional biased, ie, expect price to go up.
#2 The short call strike is the price which we expect that the stock/ETF will go to on expiry. Because the max gains are capped at this strike price and would only be achieved close or on expiry. Nevertheless, most of the time we will not keep the trade on till expiry. It can also be set according to the target risk to reward ratio, although the expected move can be higher than the short strike.
#3 Risk to reward ration 1:1.5 is optimum.
#4 The width of the strike price of the long call and the short call less premium paid, is the max gain and the premium paid is the max loss as this is a defined risk trade.
Last Friday, we put on a Bull Call Spread on VIX, DTE 15 February +19C / -21C for #0.93. Max gain is $1.07, not the best price, but we entered earlier than planned as we saw that VIX is not going down further even if the SPX was going up, an indication of stronger fears in the market.
For more insights to the set-up of the trade refer to last Traders Talk (24.0) below and also Quick Bites.
TRADERS TALK
This week, we are taking off for the Chinese New Year festivities. Trade safely….
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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.
What just happened yesterday? Whipsaw day :D luckily took some shorts profits off the table. Stay nimble, market's volatile.
Apologies...small TYPO, suppose to be BULL CALL SPREAD and not BULL PUT SPREAD... if you received the email in error apologies again... the online version has been corrected :)