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

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.

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.

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

*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:

Put Side:

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:

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

January 23, 2023.