Learn Options Trading Strategies on Your Schedule

Tom Gentile

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By: Tom Gentile
March 13th, 2024

8 mins read

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

Earnings for this part of the year is about wrapped up.  For those of you who have studied with my colleague Mike Wade in his Earnings Mastery course I wish you continued success in your learning and trading of the strategies taught.

What is the options trading focus now? Well, since the markets have been on a nice bullish ruin since October of last year why not learn a ‘Momentum’ style of options trading as taught by my colleague Joe Contes in his Trend Mastery course? 

Of course, not everything trades higher or lower forever. In fact, some stocks trade in a sideways channel for periods at a time and where many think no movement, no money let me offer up Jeff Beamer who specializes in an options trading strategy called Time Spreads or Calendar Spreads which are used to derive profits from equities that channel sideways.

These are just 3 of 6 Mastery Courses we have run within my company over the years. These and the other 3 (all 6) are available now.

Have you ever wanted to join a Mastery Program but couldn’t make the live events? Well, this year I wanted to change it up and offer you the ability to learn on your time with our brand-new Mastery On-Demand offering.

Choose from a wealth of Mastery Programs, including our System Mastery, Hedge Fund Mastery, and Trend Mastery — or choose to get access to all of them with the All-Access pass.


Market in Focus: QQQ– Invesco QQQ Trust

QQQ Trading Upward Channel

The Q’s as this security is more referred to as, is an ETF or tracking security if you will as it tries to replicate the performance of stock in the NASDAQ 100.

The magnificent-7 stocks are holdings in this trust / ETF.

All three major averages, the Dow – NASDAQ – S&P 500 all experienced losses for the past 2 days in a row.

There is concern about what the Fed’s stance on inflation is and if they are going to start cutting rates sooner rather than later, but based on Powell’s talking points today it isn’t definitive they are going to cut any time soon.

It’s not out of the question for June, but as I am researching the assessment is no new news from Chairman Powell is good news.


From the Desk of a CMT – XLE Short-Term Bullish Case Study

After continuing to accelerate out of a long-term linear regression channel to new all-time highs, SPY had a 1% decline on Tuesday on increased volume. Momentum via the rate of change (ROC) continues to have peaks that are diverging from price, but it appears to be moving sideways rather than declining. Traders do need to keep in mind that from an objective trend consideration, SPY remains in the most bullish set-up possible: 

Price > 20-dy SMA > 50-dy SMA > 200-dy SMA

All four of these measures are trending upward as seen in figure 1. Keep anchored in what is for the broad markets and the securities you trade.

Figure 1: SPY with Linear Regression Channel (9/30/22-10/27/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)
Figure 1: SPY with Linear Regression Channel (9/30/22-10/27/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)

Last week two ETFs from the Select Sector SPDRs were assessed after running the stock ranker, Tom’s Movers:

  • XLE: Neutral (longer-term) to bullish (shorter-term)
  • XLU: Bearish (longer-term &intermediate term) to bullish (shorter-term)

Although three commonly applied simple moving averages are used to identify trends for different time periods, the key is to have an objective tool that helps you define bullish, bearish, and neutral conditions for the stocks, sectors, or indices you wish to trade. You may prefer different time periods or a different type of moving average or may even keep it simpler by identifying highs and lows over a specific period (i.e., is it making higher highs in an uptrend or lower lows in downtrend over your short-term time horizon?). 

Identify the tools that work best for you to stay grounded and recognize an exit will still require risk managing to a specific value for the underlying and/or option.

Figures 2 & 3 provide updated charts for XLE and XLU, with XLE’s bullish short-term trend continuing and XLU’s short-term trend being confirmed by the ROC. There is no regression channel drawn for XLE; however, XLU’s downward trending channel was drawn from 10/14/2022 to 10/6/2023.

Going back to last week, here’s what we were considering:

XLE: Option traders can think longer-term with XLE if it suits their style by taking advantage of strategies that benefit from sideways price action or risk manage an emerging bullish trend. The specific strategy will require a view of implied volatilities for XLE over the appropriate time horizon.

XLU: Consider looking at the component stocks for XLU to see if you can identify a more bearish case as an opportunity or wait for XLU to get through the 50-dy SMA or 20-dy SMA to help provide a nearby area of support or resistance for your time horizon.

Figure 2: XLE with ROC (14, 7), Volume, and SMAs (20, 50, & 200)
Figure 2: XLE with ROC (14, 7), Volume, and SMAs (20, 50, & 200)
Figure 3: XLU with Linear Regression Channel (10/14/22-10/6/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)
Figure 3: XLU with Linear Regression Channel (10/14/22-10/6/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)

My personal preference (not a recommendation) is to consider a shorter-term bullish opportunity for XLE using the Smart Search tool after assessing implied volatility (IV) conditions.

Figure 4 displays the 7-30-day ATM IV data for XLE, with a relatively low IV environment that allows us to search for a bull call spread.

Figure 4: XLE 7–30-day ATM IV (3/5/2024)
Figure 4: XLE 7–30-day ATM IV (3/5/2024)

Smart Search Access: Searchers > Multi – Strategies > Smart Search

Figure 5: XLE Smart Search Page (3/5/2024)
Figure 5: XLE Smart Search Page (3/5/2024)

The Bull Call Spread strategy was selected and the ranked spreads used percent to double for the initial sort. With XLE closing at 86.85, the top ranked spread buys an in the money option and sells an out of the money option for an exceptionally low net debit. I’m afraid that’s where we need to change things up because the quoted spreads reflect a closed market and some opportunities that are highly unlikely to be available.

This case study will continue using option quotes that are at the top quartile for the long option and the bottom quartile for the short option, so a less favorable debit amount is used. This is instead of the midpoint level. 

It will be easier to understand as we run through it. Figure 6 provides the scan results and figure 7 the adjusted entry premiums for the top ranked spread, keeping in mind conditions will be different when you run any rankers during market hours. A single option is used for each leg to reduce confusion given the quotes provided.

Figure 6: XLE Smart Search Bul Call Spread Results – Quotes with Closed Market (3/5/2024)
Figure 6: XLE Smart Search Bul Call Spread Results – Quotes with Closed Market (3/5/2024)
Figure 7: XLE Mar 22 89-84 Bull Call Spread with Updated Entry Data (3/5/2024)
Figure 7: XLE Mar 22 89-84 Bull Call Spread with Updated Entry Data (3/5/2024)

Rather than the Max Risk – Max Profit displayed in the rankings, the risk – reward for this single spread is $225 risk for $275 reward. Still reasonable but I suspect it would move the spread down the rankings a bit. From this point, we’ll assume an entry at the given values and think about risk management and different exit triggers.

Case Study for short-term bullish assessment of XLE:

Buy call to open, 1 Mar22 2024 84 Call

Sell call to open, 1 Mar22 2024 89 Call For a net debit of $2.25

This single leg is below a max risk of $500 used in the past, we’ll focus on an exit for a profit, a timed exit, and some technical levels that would prompt an exit.

Figure 8: Enlarged view of XLE Bar Chart (3/5/2024)
Figure 8: Enlarged view of XLE Bar Chart (3/5/2024)

XLE has had higher highs in this short-term move with the next higher high to surpass at 87.56 at the close on Nov 2, 2023.

This is not a far distance for XLE to travel, and you may have noted that the breakeven in the risk data is actually below the 3/5/24 close. A short-term move to that level will likely result in more modest gains with the long call in the money and the short call out of the money and not benefiting from time decay. Thinking about booking profits does matter.

One benefit of establishing multiple spreads is the ability to scale out of a position which would allow initial profit taking at a previous high point and using the next high point to book additional gains.

Using the same logic for the exit, the last touch of the 200-day SMA was on 2/20/2024 when XLE closed at $84.79. A close below this recent low will be used to exit the case study for an expected loss. 

The last consideration for this very short-term strategy is to identify a timed exit for the spread. The case study will be exited before the close on Friday March 15th (monthly expiration) since it is a long premium position.

A technical approach to this short-term strategy is to also add an exit signal if XLE closes below its 20-day SMA, which would be a change in conditions for the short-term trend.

Regards,
Clare White, CMT


Thanks, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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