There really isn’t too much to say at the moment. Our positions keep chugging along and while they are all still in a healthy position the margins of error, particularly to the upside on our SPY and IWM iron condors, have narrowed a bit. No worries, we will make adjustments if necessary, but for now the probabilities on all our trades remain in reasonable territory.
As for next week, well, due to the rally over the past week, we are seeing numerous ETFs hit a short-term overbought extreme. We don’t want to react too quickly, but if we see a continuation of the current trend higher, I think a trade or two will be in the cards as we want to take advantage of ETFs in a short-term overbought extreme. SMH is already there, but I would like to see a few others join the group before taking on another position.
Cabot Options Institute – Quant Trader Issue: July 22, 2022
There really isn’t too much to say at the moment. Our positions keep chugging along and while they are all still in a healthy position the margins of error, particularly to the upside on our SPY and IWM iron condors, have narrowed a bit. No worries, we will make adjustments if necessary, but for now the probabilities on all our trades remain in reasonable territory.
As for next week, well, due to the rally over the past week, we are seeing numerous ETFs hit a short-term overbought extreme. We don’t want to react too quickly, but if we see a continuation of the current trend higher, I think a trade or two will be in the cards as we want to take advantage of ETFs in a short-term overbought extreme. SMH is already there, but I would like to see a few others join the group before taking on another position.
Current Portfolio
| Open Trades | ||||||||
| Open Date | Ticker | Strategy | Trade | Open Price | Current Price | Current Return | Current Probability | Delta |
| 6/30/2022 | IWM | Iron Condor | 8/19/22 195/200 - 145/140 | $0.70 | $0.58 | 2.50% | 86.33% (call) - 97.11% (put) | -6 |
| 7/8/2022 | GLD | Bull Put Spread | 8/19/22 155/150 | $0.60 | $0.64 | -0.81% | 74.96% | 13 |
| 7/14/2022 | SPY | Iron Condor | 8/19/22 417/412 - 335/330 | $0.70 | $1.28 | -13.12% | 75.46% (call) - 96.54% (put) | -7 |
| Closed Trades | |||||||
| Open Date | Closed Date | Ticker | Strategy | Trade | Open Price | Closing Price | Return |
| 6/2/2022 | 6/13/2022 | SPY | Bear Call Spread | 7/15/22 440/445 | $0.70 | $0.05 | 14.94% |
| 6/8/2022 | 6/17/2022 | XOP | Bear Call Spread | 7/15/22 190/195 | $0.70 | $0.04 | 15.21% |
| 6/22/2022 | 7/13/2022 | SPY | Bear Call Spread | 7/15/22 405/410 | $0.75 | $0.35 | 8.70% |
Volatility Talk
The investor’s fear gauge, otherwise known as the VIX, finally decided to push lower. While the volatility index had previously held steady for a few weeks, the sharp rally in the S&P 500 helped to push the VIX lower this past week. The volatility gauge is now trading for 23.11. For over a month the VIX has managed to push from 34 to where it currently resides, losing roughly 33% in the process.
But now we are seeing extreme short-term oversold readings in the VIX which typically means a short-term reprieve is right around the corner. How long it lasts is anyone’s guess, but certainly letting some air out of the bullish balloon over the next few trading days wouldn’t be a surprise given the short-term oversold reading in the investor’s fear gauge.
As you can see in the chart above, since 2022 began, we’ve seen the investor’s fear gauge continually rise, setting higher lows throughout the year. Volatility continues to define the market in 2022, and until fears subside on a potential recession, rising inflation and ongoing geopolitical turmoil, I don’t expect much to change.
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 July 25, 2022.
Here are the various levels I use to determine if an ETF is in an oversold or overbought state.
| Very Overbought | greater than or equal to 80.1 |
| Overbought | 60.1 to 80.0 |
| Neutral | 40.1 to 60 |
| Oversold | 20.1 to 40.0 |
| Very Oversold | less 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
The sharp market rally over the past week has helped to push ARKK, DIA, HYG, IWM, KRE, QQQ, SMH, SPY and XRT into a short-term overbought states with SMH being the lone ETF to reach an extreme short-term overbought state. As a result, expect to see a trade or two next week as we want to take advantage of the short-term extremes in several of the ETFs mentioned on our watch list.
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| ARK Innovation ETF | ARKK | 64.5 | 54.8 | 72.7 |
| Proshares Bitcoin ETF | BITO | 94.9 | 37.3 | 66 |
| SPDR Dow Jones | DIA | 20.4 | 29.2 | 70.3 |
| iShares MSCI Emerging Markets | EEM | 23.6 | 37.6 | 59.6 |
| iShares MSCI EAFE | EFA | 23.7 | 38.3 | 65.1 |
| iShares MSCI Mexico ETF | EWW | 28.5 | 27.8 | 43.7 |
| iShares MSCI Brazil | EWZ | 37 | 48.7 | 38.5 |
| iShares China Large-Cap | FXI | 33.1 | 22.3 | 46.4 |
| Vaneck Gold Miners | GDX | 45.1 | 66.7 | 38 |
| SPDR Gold | GLD | 18.6 | 24.4 | 41.3 |
| iShares High-Yield | HYG | 15.7 | 47.6 | 74.9 |
| iShares Russell 2000 | IWM | 27.9 | 44.6 | 75.3 |
| SPDR Regional Bank | KRE | 29.4 | 20 | 73 |
| Vaneck Oil Services | OIH | 59.3 | 60.3 | 41.5 |
| Invesco Nasdaq 100 | QQQ | 30.3 | 53.8 | 76.5 |
| iShares Silver Trust | SLV | 30.7 | 25.2 | 40.2 |
| Vaneck Semiconductor | SMH | 37.6 | 48.5 | 80.7 |
| SPDR S&P 500 | SPY | 23.6 | 41.8 | 72.4 |
| iShares 20+ Treasury Bond | TLT | 23.6 | 50.5 | 62 |
| United States Oil Fund | USO | 50.9 | 39.4 | 43.6 |
| Proshares Ultra VIX Short | UVXY | 110.2 | 12.4 | 26.2 |
| CBOE Market Volatility Index | VIX | 86.7 | 2.2 | 30.1 |
| Barclays S&P 500 VIX ETN | VXX | 64.8 | 4.8 | 27.2 |
| SPDR Biotech | XLB | 26.5 | 49.5 | 67.5 |
| SPDR Energy Select | XLE | 42.7 | 60.6 | 52.9 |
| SPDR Financials | XLF | 26.6 | 28.2 | 68.5 |
| SPDR Utilities | XLU | 20.7 | 42.2 | 38.4 |
| SPDR S&P Oil & Gas Explorer | XOP | 54.2 | 40.2 | 56.3 |
| SPDR Retail | XRT | 41.3 | 64.1 | 72.9 |
Stock Watch List- Trade Ideas
As I wrote last week, I definitely don’t want to open a trade prior to an earnings announcement, but I certainly will be looking for a few opportunities after earnings are announced and some of the companies on our list hit short-term extremes. Right now, I’m keeping a close eye on NVDA, SBUX, and WMT as they have all reached a short-term overbought extreme. T and VZ have pushed into an oversold extreme so I’ll be watching those as well, especially since earnings would have passed in both as we enter next week.
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| Apple | AAPL | 37.3 | 46.7 | 76 |
| Bank of America | BAC | 39.7 | 29 | 71.1 |
| Bristol-Myers Squibb | BMY | 24.8 | 45.3 | 33.3 |
| Citigroup | C | 39 | 31.9 | 77.2 |
| Caterpillar | CAT | 41.2 | 62.8 | 58.3 |
| Comcast | CMCSA | 37 | 49.1 | 75.6 |
| Costco | COST | 29 | 30.5 | 77.3 |
| Cisco Systems | CSCO | 31.8 | 53.9 | 69.2 |
| Chevron | CVX | 41.5 | 74.2 | 57.4 |
| Disney | DIS | 43.5 | 40 | 78.8 |
| Duke Energy | DUK | 24.4 | 79.4 | 34.5 |
| Fedex | FDX | 38 | 31.5 | 58.6 |
| Gilead Sciences | GILD | 30.6 | 32.1 | 39.3 |
| General Motors | GM | 52.7 | 53.2 | 71.4 |
| Intel | INTC | 46.6 | 79.3 | 79.7 |
| Johnson & Johnson | JNJ | 20.5 | 36.7 | 31.1 |
| JP Morgan | JPM | 33 | 30.6 | 58.3 |
| Coca-Cola | KO | 25.6 | 54.2 | 36.9 |
| Altria Group | MO | 35.7 | 76.8 | 54.7 |
| Merck | MRK | 25.8 | 46.1 | 34.6 |
| Morgan Stanley | MS | 35.6 | 26.8 | 80 |
| Microsoft | MSFT | 36.1 | 48.1 | 62.5 |
| Nextera Energy | NEE | 33.8 | 58.4 | 50.9 |
| Nvidia | NVDA | 56 | 39 | 80.6 |
| Pfizer | PFE | 33.3 | 48.9 | 45 |
| Paypal | PYPL | 76.3 | 83.2 | 77 |
| Starbucks | SBUX | 39.7 | 65.7 | 83.6 |
| AT&T | T | 29.9 | 64.2 | 18.9 |
| Verizon | VZ | 24.1 | 73.3 | 19 |
| Walgreens Boots Alliance | WBA | 32.3 | 26.5 | 50.2 |
| Wells Fargo | WFC | 40 | 16.1 | 75.9 |
| Walmart | WMT | 26.9 | 63.6 | 88.1 |
| Exxon Mobil | XOM | 44.2 | 66.8 | 54.8 |
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 has rallied almost $25, or roughly 6.5%, since we added our SPY iron condor position one week ago. SPY is now trading for 398.79. Our probability of success stands at 75.72% on the call side and 96.54% on the put side of our iron condor. The probability of touch on the call side is just under 50%, at 49.82%. The probability of touch on the put side is 6.80%.
For the moment, our call side looks like it could be tested. We still have roughly a $13 margin of error before hitting our short call strike of 412, but I plan on making an adjustment if SPY keeps trending higher next week. Our iron condor is currently trading for $1.28, $0.58 higher than when we first sold the spread. We are still in good shape here, but our wiggle room to the upside has quickly narrowed. I will be keeping a close eye on this one to see how it develops over the next week.
Call Side:
Put Side:
Iron Condor: IWM August 19, 2022, 195/200 – 145/140
Original trade published on 6-30-2022 (click to see original alert)
Background: IWM, and almost every other ETF, has been incredibly volatile as of late. With volatility still hovering well above normal and an IV rank sitting at a heightened 79.68, I decided to sell the August 19, 2022, IWM 195/200 – 145/140 iron condor with 50 days until expiration.
At the time of the trade IWM was trading for 169.27. We sold the August 19, 2022, IWM 195/200 – 145/140 iron condor for $0.70 with a 93.67% (upside) to 84.24% (downside) probability of success. The probability of touch was 12.90% (call side) – 30.45% (put side). The expected range was from 156 to 186.
Current Thoughts: IWM, like SPY and all the other major indices, rallied hard over the past week. As a result, IWM is now trading for 182.42, over 7% higher than last week. Our probability of success stands at 86.03% on the call side and 97.13% on the put side of our iron condor. The probability of touch stands below 29% on the call side and 6% on the put side. The spread is currently trading for roughly $0.58. Our probabilities remain healthy and while we’ve seen a sharp move to the upside, IWM has now pushed into a short-term overbought state so I would not be surprised to see a reprieve over the next few trading days. Regardless, the probabilities will lead the way and right now they are in great shape as we move closer to the August 19 expiration cycle. Of course, I fully intend to take off our IWM position in the next few weeks if the market allows us to get out for a decent profit.
Call Side:
Put Side:
Bull Put: GLD August 19, 2022, 155/150 puts
Original trade published on 7-8-2022 (click to see original alert)
Background: On July 8, GLD had reached an oversold extreme.
The options in GLD were trading at inflated levels and the IV rank was reading 86.85. As a result, I decided to sell the August 19 GLD 155/150 bull put spread.
At the time of the trade GLD was trading for 162.46. We sold the August 19, 2022, GLD 155/150 bull put spread for $0.60 with a 77.41% probability of success. The probability of touch was 45.08%. The expected range, or expected move, was from 156 to 170.
Current Thoughts: GLD is currently trading for 160.27, $5.27 above our short put strike of 155. Our probability of success currently sits at 74.47% while our bull put spread is going for $0.64. If GLD can muster enough bullishness over the next few trading sessions or simply hold steady, we should be able to take off our GLD trade for a decent profit. Until then, we simply sit and stay patient as our trade remains on the dance floor.
Next Live Analyst Briefing with Q&A
Our next live analyst briefing with Q&A is scheduled for next 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, 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 July 29, 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.