Weekly newsletter of MYstylework - Issue #86
FREEBIES
FREEBIES...
Once in a while we get some kind of freebies and would take the opportunity to enjoy it. This weekend, everyone had ice cream spree as HSBC gave out free Baskin Robbins ice cream for 3 days to all its card holders. We also took opportunity to have ice cream in the morning, in the evening and at night at every Baskin Robbins store we can find nearby. All in all, we took like 10 ice cream during the 3 days. 2 stores which we visited, the que was too long, so we gave it a miss. I don't recall paying for more than 10 Baskin Robbins ice cream for the past 5 years...but when it comes free, eat your heart out.
Perhaps, in celebration of higher interest rates, the bank is giving some back to its customers. This year, the Malaysian central bank has raised interest by 100 bps but yet our currency still continue to get hammered now at exchange of 4.75 to a US dollar and 3.38 to a Singapore dollar. Things are going to or already become more expensive, we would need to service higher interest rate, many more companies will curtail their business if the global economy goes into recession. We are headed to tough times, perhaps a FREE ice cream can make us more happy going through our day... hopefully more companies pass on some good to us in the days and months to come.... also the recovery of the markets will also bring many smiles to investors out there.
SPX - 3770
SPX was down 3.35% or 130 points last week, closing at 3770. The Fed increased interest by 75 bps and the Fed Chair continue to stress that the action of rate hikes will continue as long as it takes, bringing down the market after this remark. Non Farm Payroll came out better than expected which means labour markets are still strong and the effects of higher rates on the economy has not sizzled it down.
Last Friday's market close was strong, up 50 points from down 58 points to the low side. That's like almost a 2+% intraday move. We closed our shorts (Bear Call Spread) on SPY for a profit during the intraday down move. The trade was entered on 26 October, just 8 days in and the premiums almost depleted by 86%. Entries at support or resistance levels brings higher probability for the trade.
This week, mid term elections is expected on 8 November and Thursday 10 November, CPI announcement. Expect high volatility again for the week. Lookout for a breach above 3800 and retest 3900 resistance levels. 3600 will still be the low fallback for SPX. VIX on the other hand looks complacent at 24.56 even coming to another major event this week. Monitor it and if it continues to drop or indifferent during down days, it would be a good opportunity for longs on dips.
This week's trading range is 3675 to 4000.
NDX - 10857
NDX is down big for the week, retracing almost 6% to close at 10857, 689 points down. AAPL ended its 2 weeks rally down 11% for the week. It seems that NDX is going to retest the lows as the core CPI index this week would be core to the next Feds decision if the rate hikes will increase further than now expected, going above 5%! Comment from the Fed was that as inflation was running at 8.2% which means at 5% interest rate, the negative carry would still drive people to spend more as you will lose 3% if you keep cash.
Nevertheless, a lower inflation announcement would drive the market up very fast. The strongest stocks in the lot like GOOGL(-43%), AMZN(-52%) and AAPL (-24%) have all gone down. What goes up must come down (inflation), if it does not happen this round in November, maybe in December. But once the hikes goes below 75 bps, that will give a market push up. So there would bound to be opportunities for long term buys at these levels. Just split your buy ins into few tranches. Assuming you split into 4 the first one at this level, if it goes down another 10% put in your second level and so on till you have done all 4 levels presuming the down trend continues.
If that happens, that would mean another 35% down for the stocks from current levels. This would be good opportunities if it happens all the way down and if you have conviction on these stocks as eventually things would normalise and the fundamentally strong heavyweights in market will tend to go back up with the general market. But you will never know if it will drop all the way down another 35% and might go up leaving you behind if you wait for the lowest. Anyway, there's always 2 thoughts to it, some might just wait for a confirmed reversal to be safe but buyin at a higher price, that's totally okay too.
Watch for levels of 11650 up and retest of low support at11500. Last Friday, NDX closed with a bullish candle but futures opened gapping down -45 points to the lowest almost -100 points in first minutes of opening but as the day passed, this gap has mostly been filled back.
Expect this week's range to be at 10100 to 11400.
SAFE MARKET SHORTS OR LONGS?
With many stocks down already by more than 50% is there still opportunity for short plays? Yes, of course but the risk for shorts are higher now compared to six months back. Example, META gapped down another 25% after its latest earnings announcement. Market did not like what it saw and on the forecast going forward. If you looked at the past 4 quarters of FB earnings, you can see that each time a bad earnings or negative expectation came out, at least 10% if not 20% down as standard.
So as it seems, it would be profitable shorting stocks pre earnings but for now, it would be a riskier transaction as these stocks have been beaten down so bad that if a small positive outlook comes out, the reversal will be very strong. This is a similar situation with most stocks.
So do we still have opportunities on safe market shorts? Yes of course, but days trade held have to be shorter and best to do it on the indexes or the ETFs on indexes. QQQ, SPY and IWM would be the most common ETFs on indexes. It would be riskier to short single stocks like META because of the risk of reversals is high either based on positive stock or market news flows.
For safe market longs, prices have been so beaten down, it seems there are so much opportunities. The only thing is the volatile market will not keep long trades profitable for long due to frequent price reversals after each run. A good example is like AAPL which lost 2 strong week of rally in just 2 days. So the strategies for market longs would be take smaller profits and run.
When to execute trades? We can take 2 simple approach for the trade entry:-
Support and resistance levels. Long on support and short on resistance.
Using monthly pivots points. Short when high pivot reached and short when low pivot reached.
What type of strategies?
1. Debit trades
Call or puts
Call or put spreads
2. Credit Trades
Naked puts (only do this if you do not mind owning the stock at the strike price sold)
Credit Spreads (Bull Put Spread / Bear Call Spreads)
3. Synthetics
Long synthetics - Buy 1 Call & Sell one Put (same ATM strikes), most bullish with 100 delta mirroring 100 shares held.
Short synthetics - Sell 1 Call & Buy 1 Put (ATM), most bearish with -100 Delta mirroring shorting 100 shares.
The short puts or calls can also be structured OTM, but that will result in higher trade entry price but lower risk up till the short strike price.
Only trade this if your risk management on position sizing allows for it.
What duration?
We have to be nimble on trade duration duration these volatile periods.
1. Debit trades
Calls or puts - the stock price have to move fastest from entry time to profit. If it does not, the option value will decay and if we remain OTM close to expiry date, the option value will be worthless or close to zero.
Having a longer duration trade gives you more time to be correct but the downside is you have to pay more.
In volatile times like this safest would be 30 days but exit no later than 14 days before expiry and define also a stop loss before trade entry (ie. if price does not move as expected, exit trade and cut loss).
For debit spreads - you can use the same as above. Remember, the max profits is only reached when the price reaches the short strikes of the spread. However, during volatile times like this, if you are already in profits, exit when you see that the trend stops or reverses and not wait till expiry.
2. Credit trades
30 days to 45 days
Exit when you reach 50% profit level, you may continue to hold on longer until you see a price reversal on the stock price
If you get into more than 50% of the profits in half or less than half of the trade duration, consider exiting and re-establish new position on new support/resistance.
3. Synthetics
Longer duration will be more expensive.
As we use this structure only if we are very strong about the directional move, a predefined cut loss and profit target price will be decided before trade entry.
During volatile markets, 30 days would be prudent based on cost of trade but watch for a quick exit for a risk and reward based on cut loss level. However, if it does not POP quick on entry, exit if already in profits and look for other trade opportunities.
Take a step at a time to familiarize with different trade strategies as all will work based on a directional move but their trade behavior will be slightly different. As complicated as it gets, if you follow certain trade entry rules and risk management, you should be on the right track. Test a trade out on an ETF and let us know your results!
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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.