Economic Reports This Week Could Make or Break Short-Term Market Momentum

Tom Gentile

Posted in

By: Tom Gentile
October 18th, 2023

5 mins read

Originally published via our newsletter previously. Subscribe for early access!

SPY 10-03-2023 to 10-11-2023
SPY 10-03-2023 to 10-11-2023

The economic reports due out this week, starting with the PPI that was released today, is what investors and stock/ option traders are going to use to gauge the pulse of the Federal Reserve and what there stance on monetary policy is going to be.

The PPI came out today at 0.5% for September.  This number was higher than the estimate for a 0.3% rise. The 0.5% represented a slowing from the 0.7% the prior month.

Due out tomorrow is the CPI and Initial Jobless claims.

The last Fed meeting showed officials had mixed views on whether to do just one more hike or leave well alone.  Maybe these numbers will help them get more on the same page.

Market in Focus XLE: Energy Select Sector SPDR Fund

This is an ETF that helps track oil and energy.  It is the chart I use to assess my directional bias in oil and energy.  I then look at my scans to see if XLE itself ends up on a result list for either a bullish or bearish setup.

I then also look up the securities that make up the holdings of the ETF for the same reason.

XLE Energy 3 Month Sector Tracker
XLE Energy 3 Month Sector Tracker
XLE Energy Sector SPDR 07-10-2023 to 10-09-2023
XLE Energy Sector SPDR 07-10-2023 to 10-09-2023

I ran a search on over a three-month span.

The intent was to find the sector performing the best despite the pullback experienced in the markets over August, September and in to October (except for the past 4-days bump up with the Israel-Hamas War broke out).

The XLE, which is the Energy Select Sector SPDR Fund, has experienced the largest percentage gain.

This ETF, like many others, had pulled back.

This one trade a bit below their 61.8% Fibonacci Retracement level over the date range shown on the chart above.

The concern is if this bump up in price over the recent past are due to the outbreak of war in the Middle East or will it maintain it’s price level or inch higher without it.

This war may be here awhile and that right now has been bullish for XLE.

From the Desk of a CMT – Theta and Best Laid Plans

Last article two short-dated options were selected to compare theta decay, but a market decline for ADM right after entry put both options in the money to significantly reduce the impact of time on both positions.

The Money Calendar was used to identify bearish seasonality for ADM and the following puts selected from an option chain review:

Figure 1: ADM Option Chain for Oct 6 and Oct 13 (9/19/2023)
Figure 1: ADM Option Chain for Oct 6 and Oct 13 (9/19/2023)

It was noted that each option indicates theta decay of approximately -0.021, so it will have a greater impact on the lower priced option (Oct 6) for the holding period. 

The theta chart for each option was reviewed (Figure 2) and two case studies proposed to compare theta impact using a timed exit strategy for the puts. Note the Oct 6th option has 8/28/2023 as the first label on the x-axis and the Oct 13th option was initiated by the market a week later with a 9/5/2023 label to start the chart.

Figure 2: Theta Chart for ADM 81 Put on Oct 6 & Oct 13 (9/19/2023)
Figure 2: Theta Chart for ADM 81 Put on Oct 6 & Oct 13 (9/19/2023)

The guidelines for the case study were Buy to Open Put on Friday, September 22, 2023:

  • Scenario 1: 1 ADM Oct 06 81 Put (9/22/2023 update: @ $2.48) 
  • Scenario 2: 1 ADM Oct 13 81 Put (9/22/2023 update: @ $2.65)

Sell Put to Close on Thursday, September 28, 2023.

Figure 3 provides an update to each theta chart on the exit date. Now note the different theta range (y-axis) for each. Right below is the back test data for each (with breakeven data cut).

Figure 3: Theta Chart & Back test Data for ADM 81 Put on Oct 6 & Oct 13 (9/28/2023)
Figure 3: Theta Chart & Back test Data for ADM 81 Put on Oct 6 & Oct 13 (9/28/2023)

The impact from theta on 2023-09-25 represents 3 calendar days and is more significant for the later dated option.

As price declines on 2023-09-26, the relative value of theta increases, to a greater extent on the later dated option. It isn’t until 2023-09-26 that theta decay for the closer term option outpaces the later dated option, which displays a significant drop.

This is reflected as a move upward on the theta chart because the scale represents negative values.

Personally, I would have expected theta changes to be more uniform reflecting a percent of premium or days to expiration since both options had the same moneyness, but the actual movement was more random.

The market valued implied volatility for the two differently, and the theta changes reflect this. 

Take a little time to note the same charts and back test for two 81 strike call options (Oct 6th and 13th) over the same holding period (Sep 22nd through Sep 28th). Do you expected a similar but flipped profile for theta for these two options (think about it) or something completely different given both calls are out of the money throughout the holding period? 

Despite not being new, weekly options demand a renewed look at all the Greeks that impact your strategy value.

Clare White, CMT

Thanks Clare!

Tom Gentile
C1P: Chief 1-Percenter


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