Tic Tac?
What happened last week at Congress was a joke for many people. If you followed, you would have seen thousands of videos making fun of the US politicians over the hearing of Tik Tac oops…Tik Tok sorry….😂 discussions of why it should be banned in the US.
There should be more things more important to be banned in the US than a social media platform which they accuse of being a spy for the Chinese Communist Party (CCP) and a risk to children. From the antics and the way the politician speaks, it gives much discredit to what they really know and if their claims that the platform does more damage than good is “real”. There are more harm other things do and why don’t they focus and speak up on those things? Because it doesn’t pay as much? 😏
So Mr Chew, do I need to connect to the wifi, before I can publish this issue of Options Trading Newsletter? 😂
SPX (3970)
It’s a 25 bps rate hike on 22 March and there should be more to come in May. I think the Fed have more to balance between managing the banking turmoil and managing the market against their policy to fight inflation using interest as their main weapon, which is notworking too well or as effective. It’s killing off the wrong enemies and the non coordinated statements by J.Powell and Yellen is making the market even more confusing.
What we saw on Friday is more of a relief rally, helped by a small decline in treasury rates but there are no indication so far that things will become better for the US economy. With banks failing and inflation sticking at 6%, it will be a challenge to manage something which will have opposite effects. It’s like you have already lost 10 pounds and you need to lose another 10, the second 10 will be a tougher one to reduce than the first one and you will have a lot of challenge on your emotions and your urge to have some sumptuous food.
Although SPX has been up for the past 2 weeks, it seems that there is still an upper channel resistance line holding it down. We will need to see it going above 4000 level to break above for any move higher. The view is of that the rate hikes would probably come to end after May and that should spur the market up. But one thing which we are not off the hooks are the unexpected effects on the economy such as what happened on the banking sector which may bring down the market quick. So we are not really out of the woods and don’t go all in as if we will miss the boat. The banking contagion is still lingering around and looking for it’s next victim somewhere in Germany! Let’s see if it burst at that side of the world in the coming weeks…
The trading range for the week is between 3900 and 4050.
NDX (12767)
NDX was up 2% for the week as it was saved from the banking turmoil, we covered this during last week’s Traders Talk 😉. With fears that more aggressive rate hikes will break the fragile sector, the expectation of rate hikes being eased at the last FOMC meeting came down and also future rate hikes expectation also eased. Nasdaq components companies are more sensitive to interest rates and hence, with the ease, the sector also rebounded strongly back to the January highs.
We saw that it hit some resistance at 12880 which was the earlier highs on 2nd Feb. We would need to see NDX break above this level for the next run up. The support level now is around 12400 levels.
The trading range for the week is between 12500 and 13250.
HANG SENG INDEX (19915)
HSI had a strong run this week, hitting back to 20,000 level before closing loswe at 19915. If it breaks above 20,000 with a bullish candle, we should see the runup to continue back to higher levels in April.
IV SQUEEZE…
IV squeeze is something that premium sellers love best, that is if you are already in a credit position and the best kinds are always naked ones.
What is IV squeeze? Basically it is a contraction of IV on a particular stock or ETF. From a high IV to a lower IV. As you know, when IV is high premiums are richer which means you get to sell options at a higher price.
In general, there are certain times IV of stocks and ETF would spike. A common timing would be nearing some announcement eg. earnings, investor day, extraordinary announcement, FOMC meeting etc. We generally call these “Binary Events”. Our expectation is that nearing these events, IV would spike and after the event date IV would reduce or normalise.
Few things would happen when IV spikes.
#1 Premium increases
#2 Expected Move would also increase
So if we enter trades when IV increases, we get more premium and at the same time, we can get a strike with wider range to current price hence giving us a higher margin of safety.
Example would be some trades which we spoken about multiple times during previous Traders Talk on GLD ETF. During key events such as CPI and FOMC Rate hikes, IV of GLD would spike because people would tend to go back to GLD or volatility of GLD tend to be higher. In times like this IV of GLD often spike.
Example below, you see that IV spiked between 16 March to 17th March and stayed high before coning down after FOMC on 23 March.
In example below you will see a 16 Delta strangle on 20 March is worth $2.05 credit (-200C/-174.5P DTE28 April). GLD trading at $184.24 .
On 23 March, after FOMC rate announcement the strangle is worth only $1.23. Meaning a 40% decay of premium in just 3 days. The decay is caused by IV crush as GLD price was $184.39, relatively same as on entry.
Alternatively, just use IV Rank on Tastyworks platform to check if IV has spiked. IV Rank measures the percentile where current IV sits between its highs and lows. A high IV Rank would mean that the current IV is at its higher level and a low IV Rank would mean the IV is trading at its low levels.
How to use this in your trading plan?
As the IV reduction post event is expected, we can use this to our advantage with relatively safe instruments like GLD with the highest effects strategies such as a strangle to trade binary events. Relatively speaking, GLD can be traded every CPI and FOMC, which means at least 2 times per month making this one of your core monthly fixed routine high probability routine trade. 😉
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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
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.