Tom’s Weekly Newsletter March 15 2023

Tom Gentile

Posted in

By: Tom Gentile
March 15th, 2023

9 mins read

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

You may have heard folks say there are ways to make money no matter if the stock market goes up, down or sideways.

It usually come from people or organizations trying to encourage you to take their trading educational courses or seminars.

 Here are some example titles of option strategies for the three different directions the markets could trade.

Bullish Option Strategies (expected price moves higher): 

Long Call, Covered Call, Short Put, Call Debit Spread, Put Credit Spread, Butterfly Spread

Bearish Option Strategies (expected price moves lower):  

Long Put, Short Call, Put Debit Spread, Call Credit Spread, Long Butterfly Spread

Sideways:  Covered Call, Time Spread (aka Calendar Spread)

There are many other strategies.  Others can be used to hedge against the stock market moving against your directional assessment and subsequent type of trade. There are even option strategies one can employ if they expect a big price move in the security, but are unsure which direction, higher or lower it will go.  Those are known as a Straddle or a Strangle.

The key is assessing a market direction and acting accordingly and our CMT Chartered Market Technician, Clare White has a discussion on that in the ‘From the Desk of a CMT’ portion of this weeks’ newsletter.

Tom Gentile
C1P: Chief 1-Percenter

Corners of the Market

SPY – SPDR S&P 500

Image 38

We have been highlighting where SPY is from a Fibonacci point of view for a few weeks so lets look at another bit of technical analysis.

There is a gree, solid line on the chart image above slanting down to point out a descending support and resistance line on the recent leg down, (from early February to present).

4-trading days ago SPY broke out aboe that indicating a potentia bullish move to the upside was coming our way.

That was short lived as SPY has traded down since then and is now testing that old resistance line as support.

The Darknet S (Stop/Stall) signal doesn’t mean it is necessarily time to short the stock.  It means the run up from the B Bullish signal may in fact be over.

It may trade lower or it may consolidate before trading higher again.

TLT – iShares 20+ Year Treasury Bond ETF

Image 39

Like we said last week.  We love repeatable patterns.

The Darknet B Bullish signal from last week hasn’t materialized in to a bullish move for TLT, but if it does we would consider a move to the prior high a nice, bullish move.

A consideration for a stopping point on a bullish option trade is one that is a technical stop price.

Instead of using a dollar or percentage amount as a stopping point for a bullish option trade on TLT look at a price level you’d consider support and since you are basing (at least in part) a reason for a bullish option trade is an anticipated move higher off support, if it breaks that support on a closing basis, that could be when one stops out of the trade.

UUP – Invesco DB US Dollar Index Bullish Fund

Image 40

28.5 is a price point we highlighted in previous weeks newsletters as a38.2% fib retracement level.

Yesterday, Powell’s testimonial comments popped up the US Dollar (as represented by the chart on UUP) and it did not look back.

This caused the breakout above 28.5 or that 38.2% fib level, where it actually closed above that level.  UUP has now closed aboe that level two days in a row.

The concern about today’s candle pattern is it is a Doji. A Doji day is one where the security opens and closes at virtually the same price.

This means there is indecision between the bulls and bears and we consider the day a neutral day or stale mate.  The markets did not trade higher or lower.  UUP either trade higher or if it fall sbelow 28.5 it is a failed breakout.

USO – United States Oil Fund, LP

Image 41

Oil is having a very unimpressive start to its seasonal 5-month bullish pattern.

We peg the start time for mid-February as Feb 14 and from that point until now USO is trading about 2-points lower.

USO is not trending higher or lower even with it being slightly down from where we consider the start time for the pattern.

A visual component of Darknet is the tiny, black squares that show up on a chart.

This is a visual indication a Darknet S may be coming our way.  Consider it like a yellow streetlight, and it means caution.  A Darknet S may not form, but right now it is an indication that there is no true direction higher or lower for the security right now.

GLD – SPDR Gold Shares

Image 42
Image 43

From the Desk of CMT, Trade Psychology & Easing Distractions

Historically March can experience important intermediate- and long-term lows for the market which means it can also see important highs when a cycle gets inverted. Just knowing this gets in my head.

Although this March doesn’t seem to be setting up for a long-term peak or trough, an intermediate-term high is certainly possible with our current set-up.

At these times, I find it can help to take some small action to get this distraction out of my head.

It is a psychological thing – it’s not based on rules or guidelines to follow. However, by getting rid of the distraction I find I can get back to “what is” for stocks and ETFs.

This case study looks at puts on SPY solely in response to general discomfort about where we are in this decline. 

  • Has the recent intermediate move run out of steam before surpassing the Aug 2022 peak?
  • Is there an inexpensive, reasonable insurance policy (put) that can be implemented to alleviate the nagging feeling?
  • What are the true impacts from doing this to my trading plan, my P&L, commitment to discipline, …?

It’s a very qualitative list but this is the first time I’ve asked myself the last question and it’s important. 

Figure 1 provides the 400-day view of SPY with Fibonacci levels, two simple moving averages, and MACD.

Note the regular rhythm of dividends with mid-March being the period when dividends are announced with an ex-date for that dividend. The SMAs are set at 26 and 52.

Stocks > Charts > Stock Charts

The following observations can be made:

  • Price is below the faster moving average, but above the slower moving average (so the faster SMA is above the slower SMA). This is not the most bullish set-up, but the SMA positioning is bullish.
  • The 26-day SMA appears to be moving sideways, so we can objectively say the short-term trend is sideways.
  • The 52-day SMA is rising suggesting more bullish behavior over the intermediate-term. 
  • Price is trading below the 38.2% retracement at 402.87 which may now serve as resistance.
  • MACD is currently bearish.

It’s a pretty basic view of the situation and it’s fair to say the weight of the evidence provided does not support establishing a bearish position.

However, this is more about psychology. Does clearing my head for a period of time outweigh a consistently disciplined approach to trading?

Since this approach is fighting the trend, conservative money management and risk management are both a must.

Figure 1: SPY with Fibonacci levels, SMA’s, and MACD on 3/7/2023
Figure 1: SPY with Fibonacci levels, SMA’s, and MACD on 3/7/2023

Next, I’ll navigate through option chains for the next quarter (June 16) and then implied volatility (IV) charts to get a sense of the cost for deploying such a strategy:

  • Options > Options Chains
  • Options > Charts > IV Chart

Looking at the put side of the option chain for Jun 16, 2023, there’s significant open interest at 360 and 365. Also, Bid-Ask spreads for all options are reasonable given the put volume.

Figure 2: SPY Option Chain for June 16, 2023
Figure 2: SPY Option Chain for June 16, 2023
Figure 3: SPY ATM IV for >90 days to expiration
Figure 3: SPY ATM IV for >90 days to expiration

In addition to smaller slippage, IV is in the lower section of the plot over the last year, favoring a long put for protection.

Considering the SPY Jun 16 365 put with conservative money management, two contracts represent about $1,000 and is a starting point for consideration.

Max risk is $500 and must remain at this level.

Figure 4: Potential Hedge, 2 SPY Jun 365 Put on March 7, 2023
Figure 4: Potential Hedge, 2 SPY Jun 365 Put on March 7, 2023
Figure 5: Price and Risk Profile for SPY Jun 365 Put
Figure 5: Price and Risk Profile for SPY Jun 365 Put

As a reality check, what do the probability curves look like? By navigating to the bottom of the strategy data, we see the Probability of Profit throughout the life of the option is understandably low. The strike represents roughly an 8% decline from current price.

Figure 6: Probability Data on March 7, 2023
Figure 6: Probability Data on March 7, 2023

Use the hypertext link to view probability curves for the strategy. 

As a case study is formalized, it gives pause for having such a discretionary approach. It will remain something I contemplate, but an important questions arises? What is the downside target here? A move that represents 80% back down to the recent low of 356.61 (0%) seems most aligned with current conditions.

In summary, when considering a conservative insurance type seasonal strategy to reduce distractions, the following is a case study I will consider (not a recommendation):

  • 2 x Jun 16,2023 365 puts @ 5.21 for a net debit of $1,042
  • Exit for a loss with a move down to $2.61 ($500). This is difficult to execute with options.
  • Exit 30 days prior to expiration – such an out of the money option will experience accelerated time decay as we move towards expiration.
  • Exit for an expected profit at $365 (80% of the way to $356.61) assuming time value remains for the option.

When you click on the hypertext link to access the probability curve, note movement along the -1 standard deviation curve appears to bring price to the 365 level with some time to spare. How often do we see such moves? 

Let’s see how all of this shapes up with day 2 of Powell’s testimony to congress on the day this article posts.

Clare White, CMT

Thank you, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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