Weekly newsletter of MYstylework - Issue #62
WHAT YOU DON'T SEE, YOU DON'T KNOW...
WHAT YOU DON'T SEE, YOU DON'T KNOW...
Over the weekend, I was doing my routine walk up the neighborhood reservoir. I was trailing one elderly man and when I reached the peak the reservoir, the elderly man slipped into the forest trail. I never went into that forest trail before although I know a lot of people walk into that hiking trail. I hesitated a bit but then I went into the trail but I lost sight of that elderly man. Damn, he was fast as I continue to perspire from the hike up. Anyway, I continued into the trail and saw several people coming down passing me as I met more people along the way.
After some minutes in, I stumbled to a very steep path, definitely more than 80 degrees slope up. Well, I thought to myself, YOLO, lets do it and took the challenge to climb up. Some people in front of me have already turned back at the sight of this challenge. The same in life, when faced with challenge, some persevere ahead and step back.
Once up, there was a clearing and through that, I saw the spectacular view of my neighborhood from atop. Although, I stayed here for the past 20 years, the view is a sight and I wondered how I missed this for so long when I was around. I normally look up the hill from the front of my house. The sight of looking down to my house is entirely different and gives a bigger perspective of my neighborhood surroundings. In life we always look towards achieving something and move to the top. And when we reach it, it is really awesome but makes it feel that it is just the start and much more you can achieve in life if you challenge yourself ahead.
Thinking of it, this is exactly how people miss a lot of things, they know it is around but they never try it. Just like the stock market, where they see people generating wealth from it and they never really explore how these wealth is generated and how they too can enjoy part of it. Just like my first hike up the forest path, thinking to my self, if an elderly man twice my age can why not me....lets take the challenge and see what's ahead to enjoy....
What you don't see you don't know, what you don't try, you won't get!
SPX
The market went into diarrhea mode for the past 2 weeks breaking below 4000 emotional point going down to lowest of 3858. But just just when SPX went into a bear market of 20.19% decline from all time high, the market rebounced strongly last Thursday and continued through Friday with almost 5% up from lows closing at 4023.
The recent US CPI data release of 8.3% inflation rate which is slightly lower than last months inflation rate may seem to indicate inflation might have reached its top and may taper off downwards in the next months. If it continues to come down, the FED may not need to be so aggressive in implementing the rate hike and 50 bps per increase may well be the cap hike number.
Nevertheless, we do not expect to see a one way up an market will tend to be choppy still. Trading for week to be around 3800 to 4100 range. SPX futures opened up on Monday and hope it holds on till market opening on Monday night.
NDX
We had a nice bear rally for 2 days last week with NDX increasing 6% from its lows of 11692. Friday's closing price was 12387 which is close to the week's opening price of 12465.
NDX has gone down almost 30% from the all time high and many of the component stocks have plummeted together with this and some even by more than 90%!
Opportunity or threat? Depends on how we see it. For new investors who want to take initial positions, this is of course an opportunity and opening to get great stocks at great prices. For investors who are in already, a time to add more positions again. For investors who had leveraged in their positions, this is of course a bad time to off load as this is like the lowest point to do it.
For us, we kept on adding positions last week on MSFT, AAPL and GOOGL. Visa is again looking at a great buying point now bouncing off 200 MA on weekly. 190+ seems still to be a great support level as it has now bounced off this level for the 4th time this year.
The Twitter deal seems unreal as the stock is back down before the takeover announcement. But has given back some life to TSLA as it is back up on possibility of Elon abandoning the deal with some lame excuse which he probably already known before getting into it. The kind of market manipulation done via twits is insane, with Elon moving twitter down 25% up and down with just 2 twits. We sold some calls over TWTR shares cushioning the loss from the share price drop. Lets see what Elon will move this week, TWTR or TSLA.... I think more likely TSLA as he has more to lose there than abandoning the TWTR deal for a loss of USD1 billion...
TRADING IN HIGH VOLATILITY - DIAGONALS
A diagonal is constructed by purchasing a ITM long call far out in time, and selling a near term call on a further OTM strike to reduce cost basis. A long call diagonal is similar to a covered call but the cost on a long call diagonal is much cheaper as we do not need to own the stock.
Trade Mechanics
Buy an in-the-money (ITM) call option in a longer-term expiration cycle
Sell an out-of-the-money (OTM) call option in a near-term expiration cycle
With so many stock price at its low now, it might be a great opportunity if we can extract value out of these lows and at the same time extracting premium to finance these stocks by selling short term calls if the market continues to go sideways or even a little down.
Although it is not ideal to do diagonals in high IV environment, we compensate this with two situations. #1 stock prices are at its lows and can benefit from sudden POPs (short term rally) and #2 high IV will result in higher premium for the short dated calls sold.
We can structure 2-3 months out long DTE calls while selling short term weekly calls as current premiums for short term dated calls are high.
We seek to finance the long call with the short dated call as fast of possible to get the long dated call fully or highly financed reducing the cost basis to own the call.
Trade Criteria
Look for entry points at a price support for the stock. Lower range of a sideway trend is also a good entry point.
Choose long dated call 60-90 days or more. In volatile market, we tend to use a shorter DTE for long call because we do not want to have a high cost on calls as market downside risk continue to exist.
Sell a short DTE call between Delta 30 or 20. The higher Delta we sell if the stock price moves above, the trade profits will reduce but if stock price is at or below, we extract the high short premium and benefit more in the cost basis reduction. Check the trade risk profile to ensure that the profitability line does not go down to negative if price shoots above the short call.
Exit position when 25%-50% of the max profit reached. If price POPS shortly after entry, we can also exit the trade to benefit from the jump in call price.
Exit position, if the stock price no longer shows a possible uptrend and breaks down going lower. Set a sell stop at 20-25% max loss.
Exit the position 30 days before expiry of long DTE call. You may renew position with a new long dated call if the price action still remains intact - sideway slight bullish.
TRADERS TALK
We covered Diagonals in our previous Traders Talk. Go watch the video here.
Did you hear last week's Traders Talk?
We had a great topic and so much insight on trading was given out.
Listen to Traders Talk Series 46 if you have not done so. View Past Traders Talk here.
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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.