Options Trading Newsletter - Issue #121
Mid Life Crisis [Options Today...TLT Bond Play - Watchlist]
Mid Life Crisis [Options Today…Profit From Understanding IV]
Mid life crisis is real. I am not sure where is my middle but I think I should be there now. This is a point where you reflect where you are now in your life path all in terms of relationship, financial and health. If you feel you are in your “mid life” just do an assessment of this 3 key areas, see where you are?
Then the real question is after you find out where you are, is if you are lacking in any of the areas, how much time do you still have to fix them. I will surely be stressed up if all of the core areas is graded a “F”. That’s why people get into depression as they get older, it’s because of the “F”s and that they either do not think they have enough time or solutions to fix them.
Firstly, understand that “time” is relative. It can be changed and you have all the powers to change it. Many people say, they do not have enough “time”. But do they ever plan out what they use their time at and which are the things they should focus on? If you plan carefully on the use of your time, every hour, every, minute of the 24 hours, 1440 minutes 86,400 seconds of the day can help you spend your time wisely.
Then the next thing is “solutions”…what solution do I have to fix the problems. Well, its the cause and effects we need to know that got us into these problems. Say in a relationship, if you have a bad relationship with your spouse, then think of wat have caused it and work on rectifying it.
If on financials, if you do not have enough savings in your bank account, maybe you should look if you are earning enough or if you are spending too much. Then look for opportunities to earn more, perhaps getting into trading options may be a solution or using your skills to get additional income, example doing some consulting/training etc. Not earning enough, shall never be an excuse for people who are poor, many millionaires/billionaires started poor. You may not need to get there so high, start with making enough to care for yourself and family, then work it up higher thereafter.
Lastly it’s on health. This part is a bit tricky. Because if somethings you break it, it’s a little difficult to repair. That’s why if you read this while you are still young, take care of your health. Exercise, have a good diet and a healthy lifestyle. Don’t overwork your body as there are time to work and rest. But if you passed your time, you can only do some form of maintenance and care from that point over.
Knowing exactly where I stand in mid life now… “Mid Life Crisis” is really a scary phase. If you don’t score high here, it sucks, but it just means you got to work harder. If you passed with straight As, then you do not have this problem and congratulations for taking care of the 3 core subjects in life “Relationship, Financial and Health”. We wrote about this in Issue #25, go check it out.
"Mid-life crisis is that moment when you realize you've been running a race with a wrong map. Take the opportunity to redefine your path, recalibrate your priorities, and embrace the possibilities that lie ahead." - Oprah Winfrey"
SPX (4398)
It would take more than negative Fed Minutes or bad job reports to rock the market hard. Last week, we only shed around 51 points or 1.2% off the market till Friday after this 2 key reports. In fact, the effects on the foreign markets like Hang Seng was even bigger than SPX after the Fed Minutes came out, it shed over 3% the next day!
VIX has started to trickle up from the 12 levels to 14s now. Coming into the CPI on Wednesday, expect some volatility. Getting into IV plays would be good for this week. Those which we entered end of last month, is coming in our profit targets, lets see if we can have a good green day early part of the week to exit our positions and reenter when IV 5dCH increases again. Go checkout our IV plays on Issue #120.
Upper resistance is still around 4500 level and lower support at 4300.
Production cuts by Saudi Arabia and Russia just yoyo rocked the market last week. Good opportunity for us to catch the strong down move and also upmove of XOP.
Opposing moves on 2 different days. One day strong down and one day strong reversal.
The trading range for the week is between 4350 and 4450.
NDX (15036)
We saw some chop coming in end week where NDX had shed 142 points (1%) especially towards Thursday and Friday. The earlier ADP Non-Farm Job report on Tuesday was above expectation whereas the Friday Non-Farm report shows numbers below expectation and also increase in average hourly wages. All these are contradicting each other, at one side ADP shows strong labour market and the official US Non-Farm Payroll shows economic activity going down (recession pro) but wage inflation still up. So these are merely news and market noise which can go either side it likes depending on what the media/market makers want it to look like. As option traders, we can profit through volatility coming into these news.
Chart wise, we see double top forming on the daily chart after NDX failed to breach 15,284, previous high. “M” double pattern is bearish. The level to watch is 14,687 which is the previous low and if it breaks below, that could signal a bigger retracement to come. I would say, the big chance for such trigger point is CPI, as the market has moved from one rate hike to now possibly 2 rate hike for this year. Earlier the Fed Chair J. Powell has said 2 hikes more this year, but the market was still forecasting 1 but after less than 2 weeks, the probabilities of a second hike has has crept up, in line with the Fed.
If NDX breaks down physiological level of 15,000, it would likely retest previous low of 14,687. Brace yourself for Wednesday market move.
The trading range for the week is between 14450 and 15400.
HANG SENG INDEX (18365)
HSI did well on Monday opening but died miserably on Wednesday after the Federal Reserves minutes came out Tuesday night/after midnight. It shed over 3% which was one of the biggest move down in a single day seen for some time.
As it seems, the move down was probably overdone. We would expect HSI to recover from the down move. Support would still be at 18000 level and upside target 20,000. Sideway movement may still linger around as the current China/US trade war seems to be kicking in and out again. Anyway, we are currently in long position on MHI (Mini Hang Seng July Futures).
OPTIONS TODAY [TLT Bond Play - Watchlist]
TLT, the 20 year Treasury Bond ETF has been on a decline and is coming to a level of support at around 99. Last lows is 98.88 back in Feb 23. As short term interest rates may continue to go up for 2 more rounds till year end, there may be possibility for TLT to continue to slide back below 99 towards 90 levels. If it moves into this region, it is possible to set-up some longer term bond plays to generate some short term income while waiting for the price to come back up possibly after the Fed pivots to cease rate hike and moves into rate cuts the following year. While recession risk also comes into play to influence how TLT may behave, we may need to finance the longs with cost basis reduction strategies using short options strategy.
TLT Long Play
Long dated Call options expiry 6 months and above. If you are concerned of buying power, 3 months is also possible but TLT needs to move up fast as time decay is against us. Suggest 6 months as a safer play, unless you are patient to wait until TLT hits $90, then 3 months call is possible.
Entry
Wait for TLT to go down below $99. Target $95 is best. If it hits $95, enter an ITM Long Call -$5 below TLT trading price. eg. long Call at $90 strike when stock price is at $95.
Sell 1 OTM short dated (1 Standard Deviation or 20-25 Delta) Call 30 days (or monthly expiry call).
Management
When the extrinsic value of the short call depletes, roll with a new OTM call 20-25 delta or 1 standard deviation above trading share price. In case TLT price drops, the lowest you can roll is at the long dated call strike price. Never roll below that strike price.
Exit
Exit when your trade generates 20-25% of the Long Call investment price.
Cut loss when your losses is 50% of the long call entry price or when the price action is no longer bullish.
Conclusion
This is basically a Long Diagonal Option Strategy, taking into account slower pace upward movement to generate income while using it to finance your long call which appreciates in value when stock price goes up.
Safe Trades Tips
Diagonals on ETFs avoids the possibility of large price spikes up/down.
Good for mildly bullish stocks/ETFs which does a slower pace of upward directional movements. Gives opportunity for us to generate the full premium from the short call without getting ITM.
If the price spikes significantly above the short call strike, exit the trade. The trade should still be profitable due to the long dated call profits. On rolling always ensure that there is no risk to upside on the risk analysis chart. ie. risk profile on expiry is always above zero profit level.
Exit when your ROI is 20-25% of the investment.
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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.