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Quant Trader
Expert-Level Options for Sophisticated Traders

Cabot Options Institute – Quant Trader Issue: January 17, 2023

The market raced higher again last week and is now officially in a short-term overbought state. In fact, all of the major indices stand in a short-term overbought state. Historically, this type of situation leads to a mean-reversion event, but if we are indeed in a “new” bullish market environment, an overbought state can lead to extended moves. It’s always the transitions from high to low IV environments or vice versa that give high-probability spreads challenges. And while our positions are okay at the moment, another round of bullishness over the next week or two will force us to make either an adjustment or simply take off our trades for a small loss. Of course, I’m also still looking to add a position or two to the mix, but I don’t want to lean too heavily in one direction.

Current Portfolio

Open Trades

Open DateTickerStrategyTradeOpen PriceCurrent PriceCurrent ProbabilityDelta
1/4/2023IWMIron CondorFebruary 17, 2023 200/195 - 154/149$0.65 $1.04 75.95% - 98.10%-10
1/6/2023SPYBear CallFebruary 17, 2023 415/420$0.60 $0.99 79.42%-7
Open DateClosed DateTickerStrategy TradeOpen PriceClosing PriceReturn
6/2/20226/13/2022SPYBear Call SpreadJuly 15, 2022 440/445 $0.70 $0.05 14.94%
6/8/20226/17/2022XOPBear Call SpreadJuly 15, 2022 190/195$0.70 $0.04 15.21%
6/22/20227/13/2022SPYBear Call SpreadJuly 29, 2022 405/410$0.75 $0.35 8.70%
6/30/20227/25/2022IWMIron CondorAugust 19, 2022 195/200 - 145/140$0.70 $0.34 7.76%
7/8/20227/28/2022GLDBull Put SpreadAugust 19, 2022 155/150 $0.60 $0.16 9.65%
7/14/20228/11/2022SPYIron CondorAugust 19, 2022 417/412 - 335/330$0.70 $4.10 -68.00%
8/1/20228/29/2022SPYBear Call SpreadSeptember 16, 2022 439/444$0.70 $0.07 14.42%
8/11/20228/29/2022DIABear Call SpreadSeptember 23, 2022 350/325$0.75 $0.08 15.47%
8/11/20229/8/2022IWMIron CondorSeptember 23, 2022 220/215 - 173/168$0.77 $0.57 4.17%
9/7/20229/9/2022QQQBull Put SpreadOctober 21, 2022 260/255$0.62 $0.30 6.84%
9/9/20229/15/2022SPYBear Call SpreadOctober 21, 2022 430/435$0.75 $0.25 11.11%
9/13/202210/17/2022IWMIron CondorOctober 21, 2022 208/203 - 163/158$0.77 $0.30 10.40%
10/3/202210/25/2022SPYBull Put SpreadNovember 18, 2022 325/320 $0.54 $0.09 9.89%
10/4/202211/2/2022IWMIron CondorNovember 18, 2022 198/203 - 143/138$0.64 $0.32 6.84%
10/6/202211/2/2022SPYBear Call SpreadNovember 18, 2022 412/416$0.43 $0.28 3.90%
11/16/202211/28/2022IWMIron CondorDecember 16, 2022 205/200 - 162/157$0.75 $0.24 11.36%
11/10/202212/6/2022SPYBear Call SpreadDecember 16, 2022 420/425$0.65 $0.14 11.36%
12/1/202212/6/2022SPYBear Call SpreadJanuary 20, 2023 435/440$0.67 $0.18 10.86%
12/13/202212/15/2022SPYBear Call SpreadJanuary 20, 2023 430/435$0.54 $0.17 7.99%
12/7/20231/6/2023IWMIron CondorJanuary 20, 2023 202/198 - 160/156$0.70 $0.06 19.00%

Volatility Talk

The VIX finally pushed outside of the range it had been trading in for several months. Now the volatility gauge sits in a short-term oversold state, while the market consequently sits in the exact opposite. Typically, this type of situation leads to a mean-reversion event, but the market forces, at least at the onset of 2023, seem highly bullish. If I had to guess, and believe me it would be a guess, I would expect mean-reversion to kick in and a short-term pop in the VIX to follow. If so, expect to see SPY push lower and out of its current short-term overbought state. Moreover, this type of move should allow us to lock in a few profits and enter a few additional trades.

COI_QT_011723_VIX.png

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 January 17, 2023.

Here are the various levels I use to determine if an ETF is in an oversold or overbought state.

Very Overboughtgreater than or equal to 80.1
Overbought60.1 to 80.0
Neutral40.1 to 60
Oversold20.1 to 40.0
Very Oversoldless than or equal to 20.0

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

Ticker Symbol IVIV Rank HPMR Oversold - Overbought
ARK Innovation ETFARKK48.20.277.6
Proshares Bitcoin ETFBITO61.110.993.7
SPDR Dow JonesDIA15.71.573.4
iShares MSCI Emerging MarketsEEM18.2483.1
iShares MSCI EAFEEFA18.29.481.8
iShares MSCI Mexico ETFEWW22.20.185.1
iShares MSCI BrazilEWZ38.733.564.7
iShares China Large-CapFXI30.26.275.5
Vaneck Gold MinersGDX36.616.176.1
SPDR Gold GLD16.19.883.1
iShares High-YieldHYG10.33.676.8
iShares Russell 2000IWM21.34.979.8
SPDR Regional BankKRE22.72.566.3
Vaneck Oil ServicesOIH39.11.676.9
Invesco Nasdaq 100QQQ23.76.772.6
iShares Silver TrustSLV31.82064.5
Vaneck SemiconductorSMH31.50.776
SPDR S&P 500 SPY 18.22.172.7
iShares 20+ Treasury BondTLT20.520.562.7
United States Oil FundUSO38.238.269.3
Proshares Ultra VIX ShortUVXY101.5101.515.3
CBOE Market Volatility IndexVIX80.780.729.8
Barclays S&P 500 VIX ETNVXX69.06914.1
SPDR BiotechXLB20.320.377.6
SPDR Energy Select XLE28.228.270.1
SPDR FinancialsXLF18.418.479.5
SPDR UtilitiesXLU18.01852.4
SPDR S&P Oil & Gas ExplorerXOP37.437.467.3
SPDR Retail XRT31.131.177.2

Stock Watch List – Trade Ideas

Ticker Symbol IVIV Rank HPMR Oversold - Overbought
AppleAAPL35.445.664.3
Bank of AmericaBAC24.40.979.3
Bristol-Myers SquibbBMY22.321.650.5
CitigroupC26.10.588.9
CaterpillarCAT33.124.281.9
ComcastCMCSA35.333.483.5
CostcoCOST23.30.267.7
Cisco SystemsCSCO24.311.661.6
ChevronCVX28.20.357.9
DisneyDIS40.931.280.6
Duke EnergyDUK21.111.359.1
FedexFDX28.11.963.4
Gilead SciencesGILD29.436.950.7
General MotorsGM40.514.253.6
IntelINTC47.251.579.2
Johnson & JohnsonJNJ19.524.430.4
JP MorganJPM21.50.885
Coca-ColaKO19.615.633
Altria GroupMO22.69.744.2
MerckMRK22.720.656
Morgan StanleyMS28.48.680.3
MicrosoftMSFT33.231.760.1
Nextera EnergyNEE28.017.854.8
NvidiaNVDA50.613.773.7
PfizerPFE29.124.930.8
PaypalPYPL53.728.876.9
StarbucksSBUX31.622.672.6
AT&TT29.943.367.4
VerizonVZ27.341.667
Walgreens Boots AllianceWBA27.310.343.3
Wells FargoWFC24.70.979.9
WalmartWMT18.52.953.8
Exxon MobilXOM29.66.167.8

Weekly Trade Discussion: Open Positions

*Portfolio updated every Monday

Iron Condor: IWM February 17, 2023, 200/195 calls – 154/149 puts
Original trade published on 1-4-2023 (click to see original alert)

Background: At the time of the trade, IWM was trading for roughly 180.49. We sold the February 17, 2023, IWM 200/195 – 154/149 iron condor for $0.60. The expected range was 164 to 189.

Current Thoughts: IWM is currently trading for 187.05 and our iron condor is worth $1.04. Our probability of success stands at 76.04% on the call side and 98.09% on the put side.

Obviously, the concern now is the call side of the trade. We still have a 76.04% probability of success on the call side and IWM is currently in a short-term overbought state, so a short-term reprieve certainly looks plausible. But, if IWM continues to surge higher we will have to consider an adjustment or simply take off the trade for a small loss and move on to the next opportunity. If we do see a pullback over the coming week or two, we should have an opportunity to take the trade off for a decent profit.

Call Side:

COI_QT_011723_IWM_bearcall.png

Put Side:

COI_QT_011723_IWM_bullput.png

Bear Call: SPY February 17, 2023, 415/420 Bear Call Spread

Original trade published on 1-6-2023 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 386.20. We sold the February 17, 2023, SPY 415/420 bear call spread for $0.60. The expected range was 364 to 407.

Current Thoughts: SPY is currently trading for 398.50 and our bear call spread is worth $0.99. Our probability of success stands at 79.47%. We still have a decent margin of error on the trade and our probability of success is hovering around 80% so we aren’t concerned about the trade … yet. However, if SPY continues to push higher over the next week or so, we will need to make an adjustment or simply take the trade off the table.

Call Side:

COI_QT_011723_SPY_bearcall.png


The next Cabot Options Institute – Quant Trader issue will be published on

January 23, 2023.

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.