Options Trading Newsletter - Issue #112
Down the drain... [Option Today - Strangle on GLD]
Down the drain…
What if you have worked on something for years and you suddenly found out that all your efforts is worthless and every sweat and tears you put in can be thrown down the drain?
It must be really a hurtful and depressed feeling, I suppose. In life things happens and not everything is to your liking. Sometimes I feel that bad stuff keeps lingering around us and when we get success in something some other bad stuff happens and throws you off tangent again. You keep solving problem after problem and thinking to yourself when you are going to get out of it all. When will the day be sunny all day long and you can see the birds chirp and the squirrel linger around the freshly cut green grass??
I would say, it is just around the corner… however deep you are in the drain, your next best success in life can be just the next action you take to move forward. You would not know which one, but it will be the next one as long as you continue to try and deliver the best in whatever you do. Just keep it up because you will never know which will be the one, because it could just be the next one…
"Success is often just one step away, and that step is always the next one. Keep striving for excellence in everything you do, because you never know which step will lead you to your next great achievement."
SPX (4136)
Powell crashed the market and who saved the day? Many say AAPL but I would say the market don’t really cares and is just finding reasons to swing around nowdays. Recall last week the market rallied with strong earnings of GOOGL and MSFT and then sizzled down at the end of the week. This week, things was going down leading to FOMC meeting on 3 May and J.Powell’s statement had moved the market back down but nicely bouncing off 4050 level of previous swing low.
SPX has formed now a bigger range box between 4050 to 4170. 4200 remains the next higher key level above. The banking failures is continuing with more casualties coming into the limelight. Anyone with a sound mind and has the ability to open an account with the big boys would probably transfer their monies out from the regional banks which are smaller in size and if all minds think alike, there is possibility of more bank failures to come in the next days/months.
So do you think there could be a strong rally breaking back previous highs? For me probably not for time being. Sideways patterns may be lingering around for a while until the next impetus that will break down the market of break up the market.
The trading range for the week is between 4000 and 4200.
NDX (13259)
As expected, NDX retraced after breaking above 13200 level last Friday. It continued to decline until FOMC meeting that hiked another 25 bps on Friday bringing the Fed Fund Rate to 5.25% now. The interest rate is now finally above the inflation rate of 5%. The Fed target is to get inflation down to 2% and so far it has been using rate hikes as its main tool to fight inflation. To some extent, it has sizzled down the economy and also unexpectedly brought down few banks along its way. 😅
On Friday, the NDX surged over 2% buoyed by strong AAPL earnings. The market is all hype and rah rah with good big tech earnings but look at who has been pulling the wagon for the past 3 months… The story will be very different when the horses tire out in the next quarters.
Let’s see if NDX can maintain it’s head above 13200 as it sank below after the last rally up. Notable earnings this week, PYPL, PLTR, ABNB, DIS, RBLX & JD.
The trading range for the week is between 13000 and 13500.
HANG SENG INDEX (20049)
HSI opened the week after the holidays gapping down but quickly filled up gap in the next days. It now has gone back above 20,000 level and could possibly continue to stay above this level or move sideways for a while before breaking the 20800 previous high.
Support is sitting at weekly 50 MA.
OPTIONS TODAY - STRANGLE ON GLD
GLD has been in the limelight for many reasons and many people might think it is now safer to keep gold or gold ETF than keeping money in banks. It has now reach its high again peaking to its Aug,20 / Mar, 22 levels.
As an option seller, the price movement up or down may not be so relevant as that is directional trading and chances of you to win directionally is 50-50. We tend to look at more probabilities of getting beyond 50% and to achieve consistency at that. That’s why we trade based on parameters like volatility, trade management and duration because these factors are known factors when we enter a trade and also timing when we should manage and how we should manage are also controlled actions by us.
Lets pick a selling strategy such as a short strangle and trade it on an ETF like GLD.
Trade Set-up
Selling Out-of-the-money (OTM) call and put with different strike prices with same expiry date.
Sell a OTM call
Sell a OTM put
45 days expiry optimum.
16 delta on each side is optimum
High IV / IV Rank environment
Undefined Risk Trade
Warning! This strategy is not for amateurs. If you don’t understand what is undefined risk, read below carefully and check your risk tolerance.
A short strangle is an undefined risk position because the maximum loss is undefined on the short call side where you can be assigned minus 100 shares if the stock price goes above your strike price on expiry. And the unlimited risk arises because there is no roof where the stock price can go up, gazillion dollars is also possible although that is unheard of. You will be required to buy back 100 shares position at whatever stock price in order to square/close your short stock position.
On the other hand, the undefined risk on the short put side arise if the stock price is below your short put strike price on expiry where you will be assigned 100 shares. The maximum risk is that the stock goes down to zero…
Probabilities
Strangles are high probability trade. On entry of a 16 Delta strangle the probability of win is roughly 60-70% on entry.
If we do a 1 year backtesting on 16 Delta GLD short strangle, we get very favourable results of 82% winrate based on 28 trades of 45 days expiry period each.
Median profit per trade $127 or $2.95 profit per day
Which means a single trade would fund your daily cuppa of Starbucks coffee for a full year, how does that sound?
To do your own backtesting of strategies go to Tastylive backtesting.
Conclusion
Trading is not looking at the best stock, but looking at something which you can use it to make predictable and consistent trade. Due to the volatile markets and unpredictability of price movements, ETFs on commodities have performed well so far as movements beyond target delta range is less likely. Even if it does go beyond, it tend to reverse back to center quickly or allow for trade management with ease. Just watch out for the IV Rank to ensure that you get paid well for the trade risk.
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TRADERS TALK
Seems like after I did the show Sell in May, go away is true. I sold some key holdings before or early May and has been quite tied up with other projects and travelling regularly. Well, there is time to trade and time for other activities, and I say now I go on the theme Sell in May & Go Away. Sorry for not being able to air live on Traders Talk, I’ll make it up to you guys by more FB postings. Remember to get the Substack App where I will also regularly post Notes [Twitter like] postings on trading/market.
Our previous show below if you had not the chance to see it….
Send us an email @ support@mystlework.com if you have any questions and we can cover them during the show.
Review our past traders talk. Let more of your friends know about our show and let them benefit also. View Past Traders Talk here.
Follow-us so you will be notified when we go live! Follow and click on the notification button, so you will never miss a show.
For those who wants daily market updates, pls follow Genevieve, she gives out tons of info on her Daily Grit Capital Newsletter. I personally find it useful as a person with limited time to follow what’s happening in the market.
TIKTOK VIDEOS
Understanding IV - Part 1 - Understanding IV relation to options premium and how to read different measurement of IVs.
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Understanding IV- Part 2 - How to use IV to trade GLD ETF.
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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.
Loved your backtesting analysis and explanation!