By: Tom Gentile
on September 27th, 2023
Originally published via our newsletter previously. Subscribe for early access!
From Chairman Powell’s mouth to the market’s ear…
The Fed decided to… Drum roll…………………. Nothing. They left the interest rate where it is/was and decided not to raise this month.
They indicated there is likely one more hike to come by years end.
Last it was stated net year there will be cuts, but not as many as indicated prior.
The markets do not do well with surprises, so one might expect since things went as expected and the hike to come this year is pre planned the market would react favorably today. Alas, it did not – the Dow closed down from its intraday highs closing down 0.22%
Market in Focus
The prospect of a false breakdown was there on the first day it closed below the ascending support of the triangle, but it did not end up being a fake breakdown. It is looking like a legit breakdown based on today’s price action closing lower and on its close for the trading day.
From the Desk of a CMT – Money Calendar & Theta
It’s interesting that I so often find myself writing when a Fed announcement occurs before the article posts. September 20th is another rate announcement with expectations for the Fed to hold steady while the data Powell has referenced as relevant calls for an increase. Regardless of the outcome, keep in mind it can take a day or two for the impact to be fully felt in stocks (so Thursday or Friday)?
This seems like a good time to check out the Money Calendar to simply note late September’s seasonality. You can access this tool by selecting the Tom’s Tools button, then Money Calendar.
Seasonal conditions favor the bears with Thursday particularly negative.
Figure 2 provides the drill down information for Friday (9/22/2023), capturing the first 10 names sorted by accuracy (high to low) after sorting by the Power Meter. The lowest accuracy was 90%.
ADM is a stock with good liquidity and expectations for options with reasonable liquidity as well.
It has a short holding period which may allow for a weekly option case study/paper trade (not a recommendation) with a Sep 29th expiration.
Since semiconductors have already been declining, an at-the-money (ATM) or in-the-money (ITM) will be used if the case study is long premium (i.e., long put) and an out-of-the-money (OTM) option will be used if it is short premium (i.e., bear call credit spread).
Drilling down further, figure 3 shows the ADM historical data.
Five trading days for duration translates to seven calendar days for the period. Results range from $0.07 to $3.64 but keep in mind that the data does not take into consideration the percent change.
For context, ADM was in a range from approximately $28 – $53 from 2013 through 2020, and $60 – $83 in 2021 and 2022.
ADM’s ATM short-term implied volatility (IV) is relatively low (Figure 4, 7-30 day); however, time decay will still serve as headwind if the short-dated option is not ITM.
Let’s take this opportunity to consider two scenarios for a long-put strategy, both short-term, ITM options.
The table below provides data for Oct 6 & Oct 13 expirations and a highlight at the 81strikes.
Each option indicates theta decay of approximately -0.021, so it will have a greater impact on the lower priced option (Oct 6).
Figure 5 displays the theta chart for each option and since theta changes over time, let’s simply track two case studies to compare this timed exit strategy for the weekly options.
The guidelines for the case study include:
Buy to Open Put on Friday, September 22, 2023:
Scenario 1: 1 ADM Oct 06 81 Put
Scenario 2: 1 ADM Oct 13 81 Put
Sell Put to Close on Thursday, September 28, 2023
A single contract is used to maintain the $500 max risk when we don’t have an entry price for each option.
What are your expectations for the two scenarios?
What is the worst-case theta headwind for each scenario if it stays within its range for September?
How do you think the theta charts will change over the holding period?
Risk graphs for each case study, theta charts, and back test data will be provided in the next article.
Regards, Clare White, CMT
Thank you, Clare!
— Tom Gentile
C1P: Chief 1-Percenter
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any investment decision made or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.