It was a fairly quiet week as the market continued to push higher and now seems to be hitting some strong overhead resistance.

We did add a bear call spread to the portfolio due to the ongoing overbought nature of this market and so far, so good. But we are early in the trade, so not much to discuss at the moment.

Our SPY iron condor, due to expire in two weeks, is the current focus. SPY finally pushed through our short call strike of 412 and the major market ETF now stands slightly above our breakeven of 412.70. The historic one-month rally in July has led to an ongoing overbought reading in SPY for what is now almost three weeks.

Cabot Options Institute – Quant Trader Issue: August 5, 2022

It was a fairly quiet week as the market continued to push higher and now seems to be hitting some strong overhead resistance.

We did add a bear call spread to the portfolio due to the ongoing overbought nature of this market and so far, so good. But we are early in the trade, so not much to discuss at the moment.

Our SPY iron condor, due to expire in two weeks, is the current focus. SPY finally pushed through our short call strike of 412 and the major market ETF now stands slightly above our breakeven of 412.70. The historic one-month rally in July has led to an ongoing overbought reading in SPY for what is now almost three weeks. Typically, when we see this type of reading, a short-term reprieve is right around the corner, but nothing has occurred as of yet. I discuss my thoughts on the trade in greater detail in the trade section below.

We still need to add a few more positions for the September expiration cycle, and my intent is to add a bull put spread as we need to balance out our deltas a bit. As I’ve stated over the past few weeks, I don’t mind having a few short deltas here, but I want to add some long deltas before the overall portfolio gets too short. Plus, I just want to bring in a bit more premium as we head into the September expiration cycle in 42 days. I will most likely add two to three more trades during the early part of next week, so stay on the lookout for a few upcoming trade alerts.

Current Portfolio

Volatility Talk
Not much has changed from last week. We continue to see an extreme short-term oversold reading in the investor’s fear gauge and a break below the 200-day moving average.

As I stated last week, the VIX is one of the more reliable mean-reversion gauges, so I expect to see a near-term bounce over the coming days, especially given just how oversold it is on a short-term basis.

Couple that with all of the major indices in deeply short-term overbought states and well, again, I would anticipate seeing a near-term bounce next week, which means a pullback or at least a short-term reprieve going forward.

Weekly High Probability Mean Reversion Indicator

Below is my watch list of ETFs and stocks with the most liquid options headed into the week of August 8, 2022.

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 Watch List- Trade Ideas

Stock Watch List- Trade Ideas

Weekly Trade Discussion: Open Positions

Iron Condor: SPY August 19, 2022, 417/412 calls – 335/330 puts
Original trade published on 7-14-2022 (click to see original alert)

Background: The options in SPY continue to trade at inflated levels. With the VIX falling and the IV rank in SPY reading 79.76, I decided to sell the August 19 SPY 417/412 – 335/330 iron condor spread with 36 days until expiration.

At the time of the trade SPY was trading for 375.87. We sold the August 19, 2022, SPY 417/412 – 335/330 iron condor spread for $0.70 with a 93.08% (upside) to 87.66% (downside) probability of success. The probability of touch was 14.05% (upside) to 24.09% (downside). The expected range was 352 to 399.

Current Thoughts: SPY continued to rally this week, stretching its gains to over 10% since we added the position back on the July 14.

SPY has also pierced our short call strike of 412, and with 14 days left until expiration we will need to be careful here. Yes, we could take off the trade and move on and that might be preferred by some. In most cases that would be my choice, but SPY and all of the other indices have continued to push further and further into an overbought state. This will mark the third week of extended gains in an overbought state and with our break-even at 412.70, the position is only a short distance away from being in profitable territory.

Next week, most likely early next week, will decide the fate of our SPY iron condor as gamma will start to take over and then a small move could really impact the price of the position, especially if SPY continues to stay above 412 and in the money.

The outlier moves are the ones that test our moves. We gave ourselves an enormous cushion to the upside on this one with a 93.08% probability of success on the upside at the time of the trade. No worries, these types of moves occur from time to time, especially in this type of market, and we knew we would be tested at some point with a snapback rally, to only be impacted on one trade is incredibly fortunate. And we’ve locked in some nice gains along the way to cushion any potential losses that might occur. But that’s the nature of high-probability trading. Lock in a bunch of smaller to mid-sized gains knowing the losses will be a bit larger. They key is to keep the losses at manageable levels and as of now, we are well within our limits as a max loss isn’t remotely close. Of course, things can change rapidly, so we need to stay nimble here.

Call Side

Put Side

Bear Call Spread: SPY September 16, 2022, 439/444 calls
Original trade published on 8-1-2022 (click to see original alert)

Background: With SPY reaching a short-term overbought reading and pushing even deeper into overbought territory, I decided to add a bear call spread in SPY. SPY was trading for 412.41 at the time and we were able to sell a September 16, 2022, 439/444 bear call spread for $0.70. The probability of success at the time of the trade was 85.63% and the probability of touch was 28.98%.

Current Thoughts: Not much has changed since we entered the trade just four days ago. SPY continues to hover in overbought territory after a huge rally in July. As expected, our probability of success is right around same as when we entered the trade and so is the price. So now we just play the waiting game for either a reprieve to occur or time decay to erode our position, or both.

Call Side

Next Live Analyst Briefing with Q&A

Our next live analyst briefing with Q&A is scheduled for Wednesday, August 17, 2022 at 12 p.m. ET. As always, I will be discussing the options market, giving a detailed look at open positions, strategies used, will look at a few potential trades on the trading platform and follow up with live questions and answers. I hope to see you all there! Register here.

The next Cabot Options Institute – Quant Trader issue will be published on August 12, 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.