Tom’s Weekly Newsletter July 26, 2023

Tom Gentile

Posted in

By: Tom Gentile
July 26th, 2023

4 mins read

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

The Bullish Market Conditions are Still Intact

Until the markets give us a reason to switch to a bearish stance, our mindset of staying bullish.

Options traders benefit from trading a variety of strategies. There are bullish, bearish option strategies and there are even strategies options traders can use to capitalize on a market that is trending sideways.

One just has to be on the right side of the trade. Meaning, a bullish option trade benefits with a security trading higher, so one has to be adept at picking securities that are trending or will trend higher in price.

The same goes for bearish options traders as they need to be adept at picking securities that are or will trend lower in price.

A more advanced options trading mindset is one where they set up an option strategy that takes advantage of the fact time will pass. And an option strategy like a Time Spread, or as retail option traders will know it, a Calendar Spread. Is such a strategy that makes money with the passage of time.

My tools has the capability to scan for stocks that are considered ‘quiet’ or those that tend to range in a sideways channel.

As long as the stock stays quiet and doesn’t move too much in price this strategy pays you for just waiting for the days to go by.

The securities market, stocks and ETF’s that are comprised of stocks, are ramping higher still to the time of this writing. We have the Fed’s decision on interest rates coming next week and their decision on raising or not will be a test to the resilience of this bull run.

Tom Gentile
C1P: Chief 1-Percenter

Market in Focus

Equities: SPY

My team and I got curious about the validity and potential longer-term view on where the SPY ‘could’ go if it indeed keeps trading higher.

Since we are curious on the longer view we looked up as many days my charts go back in my tools and that is 999 days. Here is that chart.

Figure 1: 999-Day OHLC Chart on SPY
Figure 1: 999-Day OHLC Chart on SPY

We placed Fibonacci on that chart over the past 999-days and see that pullback of 50% of the difference between the closing low and high on SPY was a support area SPY has sprung higher from.

Will SPY complete a ‘mirrored move’ and run another 255-points. We are not going to definitively say that will happen, but the prospects of it doing so is there.

From the Desk of a CMT – DE Adjustment

Using the MACD ranker on XLI (industrials) component stocks [Stocks > Stock Rankers > MACD], the following diagonal spread was set-up as a paper trade on 6/27/2023:

Figure 1: DE Calendar Spread Case Study as of Tuesday’s Close (6/27/2023)
Figure 1: DE Calendar Spread Case Study as of Tuesday’s Close (6/27/2023)

Option implied volatilities (IV) percentiles were relatively low across all time frames and earnings are expected on 8/18/2023, the Monday following expiration of monthly options.

Rather than allowing an option to expire worthless given a close of 431.56, an order to buy the short July 380 put to close for 0.05 is used to risk manage the short put.

Figure 2: DE Calendar Diagonal Spread Paper Trade with Adjustment (7/18/2023)
Figure 2: DE Calendar Diagonal Spread Paper Trade with Adjustment (7/18/2023)

Note the current mid-quote loss is $453 which is fairly close to our normal case study max risk of $500; however, $750 was used for this paper trade so there’s still some room to hold the long Sep put. Figure 2 provides the current price chart with MACD for DE and Figure 3, the new risk profile for the long put.

Figure 3: DE Daily Chart with 6-dy & 19-dy SMAs and MACD (7/18/2023)
Figure 3: DE Daily Chart with 6-dy & 19-dy SMAs and MACD (7/18/2023)

Exits for an expected loss remains the same as last article and the expected gain level uses only the 2 standard deviation level:

  • Exit with an expected loss at the intermediate term high price of 445.61 from Dec 2022 (if that does not exceed the $750 max risk)
  • Exit with an expected gain at $355 (2 standard deviation band), if there’s an opportunity for reasonable adjustments

In all cases, a single close for price > 445.61 or < 355, or a loss of $750, will result in an exit the next day.

Figure 4: DE Long-Put Risk Graph as of Tuesday’s Close (7/18/2023)
Figure 4: DE Long-Put Risk Graph as of Tuesday’s Close (7/18/2023)

MACD Settings

Note the MACD settings for the initial scan were faster than the default (6, 19 versus 12, 26). That’s because declines happen more quickly. How do standard settings look for this recent bullish surge? Figure 5 displays MACD only for DE on 7/18/2023.

Figure 5: DE 12, 26 MACD (7/18/2023)
Figure 5: DE 12, 26 MACD (7/18/2023)

There’s a little less conviction in this MACD cross if this is a sustained bullish move, so we’ll also track both settings for MACD with an update next week.

Clare White, CMT

Greatly appreciated, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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