By: Tom Gentile
on August 30th, 2023
Originally published via our newsletter previously. Subscribe for early access!
The Markets will be Keying in on What the Fed Chair has to Say at the Jackson Hole Meeting Thursday
Investors, traders of securities and options and many others who pay attention to the financial markets will be making decisions on what to do with their money once we hear from Fed Chair Powell when he makes comments Thursday out of this year’s Banking Summit.
Last year when Powell spoke in Jackson Hole, his comments were of a ‘Hawkish’ tone and the markets topped out and shortly after (8-weeks later) fell 19%.
I am reading that the anticipation of his commentary this year may be the opposite of that. And there are those who aren’t expecting too much monetary policy talk this year and he will instead do more of that at the September Fed Policy meeting.
According to CME’s Fed Watch Tool earlier this week, the odds of a ‘No Change’ decision on interest rates at the September Federal Open Market Committee meeting was 84%.
That is an assessment as to what may happen or not happen in September and we will deal with that then, but right now options traders like me and my team are going to focused on what he says this Thursday and the market reaction to that.
— Tom Gentile
C1P: Chief 1-Percenter
Market in Focus: SMH – VanEck Semiconductor ETF
The SMH contains the top 25 semiconductor companies worldwide.
Today NVIDIA Corp announced earnings for their fiscal 2nd quarter. The numbers came in as follows.
Earnings: $2.70 per share, adjusted, versus $2.09 per share expected. Revenue: $13.51 billion versus $11.22 billion expected.
One can look at a chart of NVDA and see it has been one of, if not the best performing stock this year so far.
NVDA is the top holding of the SMH taking up a holding weight in the portfolio of 19.77% according to data from Marketbeat.com. This is almost twice as much as the #2 holding Taiwan Semi. As NVDA goes so goes the SMH.
From the Desk of a CMT – Sector SPDR Review: XLE Case Study Update
- Late summer low volume environment,
- Coupled with NVDA earnings and the Jackson Hole speech by Fed Chair Powell this week,
- In a backdrop of automated trading
… is certainly interesting. It seems our intraday ranges are relatively big compared to twenty years ago when summer was more like vacation time for the markets. It pays to be more attentive throughout the market day.
This update for the XLE bear put spread tracks an entry on 8/17/2023, the day after the article posted. Note there is a large bid-ask spread for both legs, so the focus should be on the midpoint when viewing the case study data. Since a spread represents a natural hedge for the trader/machine on the other side of the position, it is generally more manageable to exit the position inside the bid-ask spread.
The series of figures that follow include:
- Figure 1: Daily price chart for XLE with 20-day & 50-day SMAs, Fibonacci levels and the 14-day rate of change
- Figure 2: Updated case study as of 8/22/2023 with risk graph note
- Figure 3: Back test data as of 8/22/2023
The case study and exit rules are:
- Buy puts to open: 4 Sep 01, 2023, 90 put @ $2.66
- Sell puts to open: 4 Sep 01, 2023, 85 put @ $0.59
- Net debit: $207 x 4 = $828
Since this amount is above the max risk generally used for the case studies ($500), if the spread quote moves to $0.82, it must be exited.
Additional exit rules include…
Price exits – Fibonacci levels will serve as exits as follows:
- Expected gain ($84.82) or
- Expected loss ($89.90)
- Timed exit – Exit of one day before expiration (Thu, August 31, 2023)
Last, the probability cones for the case study are reviewed and were relatively high coming into the case study, even when default settings were used.
An additional update will be made using the lower Fibonacci level since the ETF price was moving downward towards this level.
It’s interesting, despite some movement throughout the day, a line chart makes it seem like the markets are quieter.
XLE closed near its low, right at the 20-day simple moving average (SMA).
This is the third time in five days the lows were at the SMA. Momentum is confirming the declining price.
There’s an interesting note on the next figure I don’t recall encountering before (“Risk Graph lines are indeterminate …”) but is worth including because the shape of the risk graph at 0 days to expiration always matters.
The Back test link is a selection at the top right of the risk graph page under Saved Trade Actions.
Not a lot of time has passed and, for now, the case study remains within the max risk of $500.
Keep in mind the date for these calculations is 8/17/2023. I do like to see where price moves relative to the original cone as well as its movements with any updates to the default settings. In this case, a move to 84.82 by expiration. If you run this for yourself, you’ll see that using the default predicted rate of return (0%) provides the same results as the update to 84.82.
The long put is currently in-the-money while the short leg is out-of-the- money, which should help the spread value next week as time decay has a greater impact on the short put. If this week’s events (NVDA + Fed) don’t create some volatility on the daily closes, look for intraday volatility to continue. I’m afraid that means no vacation for those of us actually pressing keys for trade entry and exit.
I hope you do get some time to enjoy the end of the summer.
Clare White, CMT
— Tom Gentile
C1P: Chief 1-Percenter
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