Options Trading Newsletter - Issue #104
Contagion...
CONTAGION…
I recall this movie Contagion which was aired more than 10 years ago, which talks about a widespread virus spreading and the CDC was franticly looking for a cure. Millions of people died before a cure was found. Coincidently, the virus came from bats, which was the same line of story used by scientist for the recent Covid outbreak. In any kind of disaster or emergency, people will start to speculate and various misinformation will spread to the public, causing chaos and panic. Some people profiteered from such misinformation!!!
Last week, a similar epidemic spread across the financial sector and the effects was a disaster, SPX dropped 4.6% (184 points). This came from the collapse of Silicon Valley Bank which spiraled into a contagion of all sorts, as everybody wants a piece of the news and many misinformation followed and the market sold off big. VIX spiked 56% from the lows of the week. It closed at 24.79. In todays world where social media is the first go to news for everybody, it is not surprising that things can move very fast in the markets. Whether it moves the way it is supposed to is always a question. Many of these postings just wants the hot news for viewership and what’s best than rumor mongering and causing fear and panic.
I’m not going to say anything here but lets see how the market goes this week, S&P futures opened gapping up +123 points and went even higher as I wrote this…CPI will come out on Tuesday and will be another “Contagion” payday for the medias…
“"A bird doesn't sing because it has an answer, it sings because it has a song."
SPX (3861)
SPX had a terrible week with many news of sorts. It dropped 4.55% (184 points) and broken all kinds of support, horizontal, trendline, moving averages, you name it, like a rocketship running out of gas. Is it normal? I would say, too overdone on news.
So what came out last week?
Fed Chair Testimony - setting a hawkish tone, which moved market expectation of next rate hike from 25 bps to 50 bps
Non-Farm Employment change +311k instead of 224k expected. Consolation, unemployment rate is up 3.6% vs 3.4%
Another bank collapse after Silvergate. This time, Silicon Valley Bank (SVB) shut down by FDIC, becoming the second largest bank failure in US history.
So what next? Just move your support lines down to 3764 and if it breaks this, it’s going to be painful as more down move would be expected and 3500 levels will be tested again. What will make or break SPX, Tuesday CPI…so watch carefully and stay light on your positions.
The trading range for the week is between 3700 and 4000.
NDX (11830)
Wow, 12000 broken just like that…this proves how fragile the market is and never be too optimistic that things will get better. We have lost 50% of the gains on the January runup and how much do we expect to hold on here? What became optimistic that the Fed will stop rate hikes by May has had a turnaround that the the Fed will up its tightening game.
Instead of inflicting pain into the overall economy the tightening process has screwed some bad decisions and plays those banks has made. It is always not easy to manage when things goes bad because when things are good nobody complain but when it goes the other way, the Fed is to be blamed, right?
So there is nothing changed in our trading plan, take profits quick and never let a trade runout too long especially if you are directional.
CPI will make or break NDX, if it comes out lower, it should be good but bad if the other way. Next support down is at 11500, higher at 11700 for weekly 200 Moving Average.
The trading range for the week is between 11350 and 12250.
TRADING OPTIONS ON HANG SENG INDEX (HSI) AND HANG SENG TECH INDEX (HSTECH)
HSI had a bad week after lower than expected GDP growth forecast came out last week. It sold off 6% finding support at the previous low in January of 19303. This should be a significant support level as prior to the last breakout from the ranging level of 19100 - 19850. HSI opened gapping up around 92 points on Monday.
If HSI goes up above 19638, it should be able to fill back the gap to 19900 quickly before the next move higher.
Wednesday, some economic data on retail sales and unemployment rate. Considering the market reopening, these data should be positive, similarly to the US markets when they reopened their economy back then.
HSI/MHI has huge trade volumes during first 1-2 hours of the day, this is where huge volatility happens and perfect for scalping trades.
QUICK BITES - VIX WINNER AGAIN!
Rinse and repeat trade on VIX with a ROI of 86%. Made a VIX bull call spread last Monday for $0.70 and exited on Friday for $1.30. The best trades are the ones which are repeatable in a predictable pattern. VIX never stays too low or too high for a long time. When it goes to either one place, the move will definitely be to the other side very quickly.
We also reminded our Traders Talk on this trade last Tuesday, if you have sat in, it would be another winner. See clippings where we explained this again.
SHIT HAPPENS WHEN YOU SLEEP
Sorry to be vulgar but this is a fact nowdays especially when market volatility kicks in. As we are on the Asian timezone, we are not able to monitor the markets for the whole day and need to get some sleep after the 1st half market session. How often is it that you go to sleep a happy chap with greens in your positions and then wake-up to findout that you lost money as everything turned? My pain is yours my friend!
To make things more difficult, the brokers impose Pattern Day Trader (PDT) rules where we are not allowed to do more than 3 day trades in a 5 day rolling period if our account is below $25,000. What this means is of you open a trade and close on same day, it counts for 1 day trade and if you do 3 day trade within 5 rolling days, they flag you and you cannot open new trades and only limited to closing.
In market environment like this, swing trades are becoming more difficult to holdout without the position reversing 360 degrees from profits to losses. So we tend to go shorter timeframe and even up to day trading which we do frequently nowdays. Downside is that you need to be onscreen if you do that and it’s quite difficult if you open a trade at 11pm and you are not able to close it by 12am which is your normal sleeptime. So sometimes, we really crack our eyeballs open losing sleep and if you are bound by PDT rules, it makes it more difficult as you can see your profits when you sleep but could not close it because your trade comes in at strike 3, which is no more daytrade limits possible.
One quick hack to circumvent this is to place an opposite trade to lock in profits before you go to sleep. You can’t close the trade but nobody limits you from opening one right? Here’s what I mean. If you entered into a call and that call are in profits, reasonable for you to close it you know you can’t do it because you will be flagged PDT the next day. So instead of closing, you enter a new put contract, which is the opposite of a call. What you do is basically neutralise the position and if the stock price moves up or down, the PL would hardly move as both trades oppose each other. Then the next day, you close both trades together to lockin the profits you saw yesterday.
In case you are flagged PDT, you can always call your broker to unflag you. The request can be done every 180 days. Alternatively, you can fund your account above USD25,000 and continue to daytrade but once the equity value falls below, they will restrict trading again.
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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.
it's better to stay late nights doing something you like 😅 ask me to work and my eyes will shut tight 😴
I feel ya on the time zone challenges too. When I lived in East Africa, it was tough to manage, and that wasn't anywhere near as extreme as the time difference in Asia