Posted June 30, 2014 10:10pm
With SPY premiums so low, one could make the argument that it is smartest to buy premium outright. That means, do not sell anything against the long calls or puts. The problem with this is that the market is just not moving. The volatility is so low that the premium is constantly eroding. But, you can take advantage of that. I believe that the market will soon have a mini correction (2-4% fall), and that the put premiums will do quite nicely. But I do not think this will happen until the middle of earnings season, so what I would do is sell weekly puts against them. If the market were to get a pullback, then I would do the same strategy but for the upside. I will outline both the bearish and bullish strategy in this post.
First is the bearish strategy. What I would look at doing is buying a September 190 put, and then every week selling the weekly 190 put. I believe that the SPY will have a pullback to the 190 level. This would represent a 3% pullback and relieve the overbought status of the market, allowing it to continue higher and hit the 200 level. The reason I suggest selling premium are for two reasons. First, it is extra income, and as long as the shorter-term option expires out-of-the-money, it will not take anything away from the profits. Secondly, and more importantly, is that the market has a path of least resistance to the upside. Therefore, I want to finance the purchase of the put to protect myself in case I am wrong. If I can collect 30-50% of the premium that I paid, this strategy would limit my loss to half of what I originally spent and therefore increase my risk/reward. It is more than possible that the market just consolidates over time and has a sideways correction. If this is the case, the premium selling will allow me to not get hurt too badly by the time decay in my long option.
Second is the bullish strategy. I think that if the market were to move higher from here, it would do it in a very slow manner, and the reason for that is because there is very little momentum. There is very little volume and little volatility to have any big moves. Therefore, the way I would play it is to buy an at-the-money put and then every week sell the $1-$2 out-of-the-money call. The reason I am not buying the OTM September call is because I will not be able to sell any premium unless the SPY rallies close to my strike. This is because SPY puts always have a fear premium baked into the puts and therefore always cost more than the calls because puts are usually in more demand and therefore the out-of-the-money strikes still cost a decent amount and can be used in a put calendar strategy.
Overall, I think the market will continue to rally over the course of the next half year, but I think it is important to recognize that there is almost no uncertainty baked into the market now which means that there is a very good probability of having some sort of a pullback really soon.
Posted May 31, 2014 8:18pm
Right now, the S&P 500 is sitting at all-time highs. I, for sure, thought that there was going to be a correction sometime in May. The way I am positioning myself is for a rally to start off June. I think that as long as the ECB does not disappoint and the Jobs Report comes in above 200k, that the market will continue higher. The reason is simply that there is no reason for it to go down.
Every reason to go down, as of now, is already known and would not result in a correction. Whether it is slow growth, Ukraine, or bonds, it does not matter. The market did not want to sell-off before and these will not be the reasons why the market sells off going into the summer. The high-flyers saw a strong bounce back and show signs of continuing the climb higher. Many people are still skeptical that the market is going to rally more, which just adds fuel to the fire. Everyone thinks the market is going to sell-off during the summer and they are positioning for it. Usually, when everyone expects one thing, the opposite happens. In turn, what I am doing is buying calls in individual stocks until the market convincingly tells me that there is going to be a sell off (for me this would be a break of the 50-day moving average on the S&P 500).
My favorite stock for a rally is Amazon. The reason is that out of all the high-flyers, Amazon has rallied the least. That may sound counter intuitive, but I think Amazon will break out above the 50-day moving average and continue up to 330 which is its prior resistance. I bought the June 21st 315 call @$6.40 yesterday to reflect that view. I will most likely take some profits at 320 and then see if it can rally up to 330. With the market at all time highs, I do not feel comfortable to be in trades more than a few days. The only reason I bought the June calls is because I think the downside is limited and I do not want the effects of time decay. I would only need a 2% move by expiration to break-even on the calls, the risk-reward is excellent in my opinion.
Posted April 29, 2014 9:45
Over the last few weeks we have seen quite a sell-off in the momentum names. However, the market did see a strong bounce over the last 2 weeks, up until Friday. I think that we are at the beginning of a two-month correction. Over the next few weeks, I think that we will see “Sell in May and Go Away”. Seasonality, a mid-year presidential cycle year points to big losses in May and June. A potentially troubling sign is that the NASDAQ has formed a bearish Head and Shoulders topping pattern. My bearish view on the market is only temporary as I think that the market will have a strong Q4 rally, due to seasonality trends.
The way I would play the correction is by buying puts in the NASDAQ and individual momentum names. The fact that the NASDAQ could not break above its 200-day moving average leads me to believe that it may test its 200-day moving average, which is around 4% lower. Another way to place a bearish bet, albeit a more conservative bet, is to sell a call spread. By selling a call spread you would need the price of the stock/index to close below both legs of the trade in order to collect all the premium.
For Long Term Investors:
I believe that the market will continue to go up over the next year or so, even though it may be a lot more choppy than it has been over the last year. It is smart to own stocks if you have a medium to long-term horizon. Something to be aware of is that the market usually has a 20% correction once every three years; we had one in 2008 and 2011, so one could say that it is possible that we have one in 2014. Therefore, I think the smartest thing to do is wait for at least a 10% correction in the S&P 500 before buying stocks for the long-term. I am bullish on the Biotechs long term. Many of the Large Cap Biotechs such as Celgene and Gilead have phenomenal earnings and seem to be very well positioned for the future. I am also bullish on Bank of America long term since I think that with the rising rate environment, BAC is best positioned to capitalize. Lastly, I am bullish on Facebook. I think that the strong earnings growth and the relative cheapness compared to other stocks in its sector lets will lead it to print $100 over the next couple years.
Posted March 30, 2014 20:16
Over the last few weeks, many of the high-flyers have fallen over 20%. All of these names are in the tech/biotech sector. More specifically, I am looking at buying some calls in IBB (the Biotech ETF) and NFLX.
First the Biotechs: right now the Biotech index has sold off more than 17% from the high. Almost all metrics show that IBB is extremely oversold and I think the bottom is near. The 200 DMA is at $216 and right now IBB is at $229. I think that if IBB were to get down to $220-$225, it would present a very good opportunity to buy some ATM calls expiring in June. Right now the ATM June calls cost around $13. I believe that IBB will regain at least half of its losses by June expiration. If that were to occur, then the option would be around a 100-150% gain. The reason that I think IBB gains back half its gains is because usually after a big correction there is a 50% retracement.
This chart shows the last big Biotech correction, and it came back to the 50% retracement:
I think that the market still has another leg higher before suffering a 10% correction. However, there are many cracks in the technicals of the market and I would only be looking to put on short to medium term trades. The only reason why I am buying June calls is because I want to give myself time for the Biotechs to bounce and I do not want time decay and IV decay to hurt me that badly. The IV is pretty high now on the Biotechs because of the recent volatility and, therefore, any bounce would cause nearer dated options to take a hit due to the IV decline.
Next is Netflix: for Netflix, I would only be looking at buying weekly calls because I think any Netflix bounce is going to be short-lived. It is quite possible you see a $20-$30 move higher on Netflix in a matter of days. The weekly $20 OTM calls on Monday should cost around $1.25-$1.50. Therefore, a $20-$30 move would yield gains upward of 500%.
April tends to be a pretty bullish month for stocks, and with the Nasdaq and the Russell each off around 5% from their highs, it may be smart to buy some May calls in these sectors. I do not think that the market will suffer many more moves to the downside because the VIX (volatility index/fear indicator) is still close to the lows. This tells me that the sell off in these sectors was due to a rotation out of the high flyers and traders do not fear the sell-off. The first quarter will basically end up flat. It is quite possible that the market consolidated during the 1st quarter and will make a sharp move higher over the 2nd quarter. If that is the case, then I think that April could make for an explosive move, and with options relatively cheap in the indexes, I think it is smart to be exposed to the long side for April.
Posted February 20, 2014 10:25
A seasonality chart is one of the best charts, especially when the first two months of the year match up almost perfectly with those seasonality trends. More specifically, I am looking at the mid-year presidential cycle seasonality chart. The chart tells us that there is going to be a rally in March and April. I am giving that prediction a lot of credence because this very same chart predicted a pullback in January, which is exactly what happened.
I want to play this rally in a very simple manner. I recently bought the May SPY 187 call for $3.25. Some of you may be asking why did you pay so much for a call? The reason is that I am going to put into play a call calendar strategy. This is when you sell shorter-term calls against your longer-term calls. I am hoping to collect around $0.10 to $0.20 per week for the next 10 weeks. This would, in turn, bring my cost down to $1.25-$2.25. Furthermore, if the S&P 500 index can hold 1850, I believe it will head to 1900 in short order.
The reasons are as follows:
- First, I think the Jobs Report will be a non-event, as the market brushes off any bad news;
- Second, 1850 is a significant level of resistance; if we can hold that level, I think the result would be short-covering;
- And lastly, I think that the next psychological level of resistance is 1900 and at that point I would expect the market to somewhat stall.
If the SPY were to hit 190 by March expiration, I would likely take off my May calls. If that were the case, I probably would not be able to sell that much premium (if the market rallied that quickly and seemed to have a lot of momentum, I would not want to cap my upside on my May calls).
In that case, I would expect a 100% gain. I was looking at a few individual names like Tesla, Amazon, and LinkedIn, but I was too slow to get in and, therefore, missed the opportunity in their gains. I think that the momentum names will continue to go higher, but I would only trade those names on a weekly basis instead of medium/long term basis.