The continuation of the market sell-off led to another slow trading week as I decided it was best to simply sit on our hands.

As I stated in my Quant Trader advisory today, the investor’s fear gauge, otherwise known as the VIX, hit strong overhead resistance last week while simultaneously hitting a short-term overbought state. Typically, this type of situation leads to a reversion to the mean, especially in the few, reliable volatility products like the VIX.

The VIX hit 35 before pulling back the latter part of the week, even as the S&P 500 continued to plummet, another sign that sellers have exhausted themselves over the short-term. Which is why this week is pivotal for not only the VIX, but the market overall.

Cabot Options Institute – Income Trader Issue: October 3, 2022

The continuation of the market selloff led to another slow trading week as I decided it was best to simply sit on our hands.

As I stated in my Quant Trader advisory today, the investor’s fear gauge, otherwise known as the VIX, hit strong overhead resistance last week while simultaneously hitting a short-term overbought state. Typically, this type of situation leads to a reversion to the mean, especially in the few, reliable volatility products like the VIX.

The VIX hit 35 before pulling back the latter part of the week, even as the S&P 500 continued to plummet, another sign that sellers have exhausted themselves over the short term. Which is why this week is pivotal for not only the VIX, but the market overall. If the VIX manages to push above 38 and hold, we could be in for a significant push lower over the next few weeks, potentially leading to a capitulation scenario as we head towards the middle of October. If not, and the VIX reverts to the mean, well, the bulls might see at least a short-term reprieve over the next week or two. As always, only time will tell.

As I’ve stated numerous times over the past month or so, the portfolio continues to perform well in what has been a very difficult market for most traders and their respective portfolios. While I would love to have more trades on, I’m perfectly fine keeping our level at five open trades per expiration cycle with the understanding that as opportunities arise, I will add more. But with a widely vacillating market and a host of bearish crosscurrents I plan on maintaining a fairly conservative approach.

But if the VIX manages to pull back and revert to the mean over the next few days, expect to see a few open alerts. If not, no worries; as October expiration nears and the premium continues to dwindle in our open positions, we will simply use the inflated levels of volatility to sell more premium in our established positions.

Current Positions

Weekly High-Probability Mean Reversion Indicator
Here are the various levels I use to determine if an ETF is in an oversold or overbought state.

Each week I also include the current implied volatility (IV) and IV Rank. I look for an IV rank above 40, preferably higher.

ETF Watchlist – Weekly Trade Ideas

Stock Watchlist – Weekly Trade Ideas

Weekly Trade Discussion: Open Positions

Income Wheel Portfolio: Open Positions

Covered Call: PFE October 28, 2022, 47 CallsOriginal trade published on 9-23-2022 (click to see original alert)

Current Comments: At the time of the trade, PFE was trading for 44.07. We sold the October 28, 2022, 47 calls for a credit of $0.56. We’ve locked in a total of $3.06 worth of premium.

Just over a week ago we decided to sell premium going out to the October 28, 2022 expiration cycle for $0.56. The premium in our 47 calls now stand at $0.40 with 25 days left until expiration. The probability of success stands at 81.04%.

Call Side:

Covered Call: GDX October 21, 2022, 26 CallsOriginal trade published on 9-7-2022 (click here to see original alert)

Current Comments: As part of our Income Wheel Strategy, we were assigned shares of GDX at the 29 strike during the July expiration cycle. At the time GDX was trading for 25.59, and it is currently trading for 24.00. Our total break-even on the position currently stands at 26.55, so with GDX currently trading for 24.00 we are down slightly on the position. No worries. Like BITO (see below), GDX offers wonderful opportunities to sell premium due to its high IV and we plan on continuing to take advantage of it.

We recently sold the October 21, 2022, 26 calls for $0.70. At the time the probability of success of the 26 calls was 72.07%. Now the 26 calls are worth $0.46 and the probability of success stands at 74.74%, and the probability of touch is 52.18%.

If GDX pushes lower and our GDX 26 calls reach $0.10 to $0.15, there is a good chance that I will buy back our calls, lock in the premium sold and immediately sell more premium.

Call Side:

Covered Call: BITO October 21, 2022, 14 CallsOriginal trade published on 9-7-2022 (click here to see original alert)

Current Comments: As part of our Income Wheel Strategy, we were assigned shares of BITO at the 16 strike. BITO closed at 13.11 at the end of July expiration, but now stands at 14.39. Our total break-even on the position currently stands at 14.02.

We recently sold the October 21, 2022, 14 calls for $0.40. At the time the probability of success of the 14 calls was 80.92%. Now the 14 calls stand at 86.20% and the probability of touch is 28.71%. The 14 calls are currently worth $0.18.

Just like our GDX calls, if BITO pushes lower and our BITO 14 calls reach $0.10 to $0.15, there is a good chance that I will buy back our calls, lock in the premium sold and immediately sell more premium. Until then, I will allow time decay to work its magic.

Call Side:

Covered Call: KO October 21, 2022, 60 CallsOriginal trade published on 9-26-2022 (click here to see original alert)

Current Comments: As part of our Income Wheel Strategy, we were assigned shares of KO at the 60 strike. KO closed at 57.89 at the end of September expiration, but now stands at 56.02.

We recently sold the October 21, 2022, 60 calls for $0.70. Now the 60 calls stand at 88.36% and the probability of touch is 23.60%. The 60 calls are currently worth $0.19.

Call Side:

Covered Call: WFC October 21, 2022, 41 CallsOriginal trade published on 9-26-2022 (click here to see original alert)

Current Comments: As part of our Income Wheel Strategy, we were assigned shares of WFC at the 41 strike. WFC closed at 39.77 at the end of September expiration, but now stands at 40.22.

We recently sold the October 21, 2022, 41 calls for $1.30. Now the 41 calls stand at 52.74% and the probability of touch is 97.90%. The 41 calls are currently worth $1.39.

Call Side:

The next Cabot Options Institute – Income Trader issue will be published on October 10, 2022.

About the Analyst

Andy Crowder

Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.