Trade The Journey

Trade The Journey

Looking for a Trade

Top of the Morning! I hope all is well and the previous week was good for your bottom line. Towards, Fed Chairman Powell announced that tapering could begin towards the end of the year. Most of the Fed board members agreed that tapering should begin sooner rather than later.

Most countries are waiting before they begin to scale back their accommodative policies. South Korea is one of the few that have raised rates. Most of the major indexes in the United States made new all-time highs except the Russell 2000.

The Russell 2000 is still in a sideways trend. The market reacted positively to the Fed Powells statements, as the monetary policy will continue to remain accomodating.

The August job reports will help determine if the economy is ready for a change in the Fed’s action. Supply chains continue to remain strained. China reopened one of its busiest ports after a single covid case caused a shutdown. China continues to clamp down on speculative home buying.

China is taking an opposite approach from the United States in terms of easy money. Financial prudence will continue to be China’s approach.

Evacuating Americans and afghans from Afghanistan is becoming more of a challenge than initially thought. Suicide bombers killed thirteen US service members and ninety Afghans. The US struck back with a drone strike and has continued to warn its citizens of further attacks. Isis claimed responsibility for the attacks.

A category five storm reached the shores of Lousiana and will disrupt energy production, tightening supply. The major oil companies in the gulf evacuated their workers.

The Coronavirus continues to wreak havoc on hospitals. Hospitals in some regions are once again reaching limited capacity. With fall coming, the coronavirus numbers will continue to rise. If we continue on the same path, one report foresaw close to a hundred thousand deaths in the US by December.

The five, ten, and thirty-year yields for bonds remained in a range from the previous week.

There are many variables in play that could change the trajectory of the market. “Buy the Dip” is the prevailing mentality, and as earnings continue to impress, the economy remains strong.

The charts below show that most of the indexes have continued to rise at a steep angle up. Below the chart, is implied and historical volatility indicators.

How long before we experience a significant pullback?

To me, the markets seem fragile and still in a stage of recovery, although new all-time highs continue. Consumer sentiment continues to be affected by the Coronavirus, and rising prices, especially for homes. Eventually, rising prices will outpace some of the income gains many have experienced as the economy reopened.

The idea of continued stimulus payments to citizens has been floated, but nothing has been passed. I will tread lightly and will pay closer attention to current events that may halt progress.


As most of my previous posts state, I like trading options. I won’t detail why I like them because you can find my reasoning in earlier posts. Options can provide the regular trader with clues on the sentiment of a stock.

You can use implied volatility to estimate future changes in stock prices. You can also look at the option statistic tab, available in the thinkorswim platform, to get an idea of the number of calls and puts being placed.

If puts are being brought, traders and investors in the market are buying protection against a future downturn. If calls are being brought, traders and investors are estimating significant price increases.

My first step is locating a sector, typically in the S&P 500, that has some movement. I prefer to receive credit when trading options, so I lean towards vertical spreads. They are relatively easy to understand and implement.

Sector:

I chose the consumer discretionary sector. Before I chose a sector, I like to look at earnings and the economic calendar.

Higher Priced stocks mean higher-priced options.

Goal: $25-$100

Stocks: GM (General Motors), F (Ford), MGM (MGM casino)

I look for option chains with a lot of liquidity like GM. Look at the bullish option volume, over thee-hundred thousand. Most of the options volume is taking place near at-the-money.

Ford Chart: Symbol: F

Implied and historical volatility both in a prolonged sideways trend.

The 200 SMA is trending higher but the 20 SMA has crossed below the 50 SMA.

The weekly pattern looks like a long sideways trend.

Vertical spreads allow you to place a directional trade and retain the credit without being entirely correct in your forecast. In other words, the position can move against you.

I can place a bullish directional trade using a bull put credit spread.

Vertical Spread: Sell October 14 put

                         Buy October 13 put

Greeks:

Delta: 22.46

Gamma: 0.24

Theta: -.04

Vega:  .05

Analysis: Low directional movement. The position is close to the current price. The Breakeven for this position is $13.45 which is a long-term resistance level. I need the position to move up, it responds negatively to volatility and gamma movement.  It also gains value as time goes on.

Credit for the position: $0.55

News: Semiconductor shortage. EV pick-ups are in high demand. Lordstown assembly plant will face a week-long shutdown. The coronavirus.


Cash-Flow for the past week:

I did quite well this week limiting my purchases. With no cash-flow crunch in the foreseeable future, I am now ready to trade.

Reason: Continued improvement.

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