COI Quant Trader Issue: December 18, 2023

Weekly Commentary

We currently have one open position, a SPY bear call spread due to expire in the January 19, 2024, expiration cycle. My hope is to add one, if not two more trades for the January 31, 2024, expiration cycle. The challenge is finding a highly liquid ETF or stock with a decent IV rank, and therefore, at least in most cases, some decent options premium. If premium just isn’t there, we might have to extend the duration on the trade, possibly going out to the February 16, 2024, expiration cycle. Either way, I intend on adding an iron condor, and hopefully a bull put spread to the mix. Of course, a slight pullback would make things easier.

On another note, I’m looking at a few different volatility plays. With the VIX hitting four-year lows last week, I wouldn’t mind having a bit of volatility exposure just in case volatility popped over the next three to six months. I’ll send out an alert, if and when, I decide to take a position.

As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Current Portfolio

Volatility Talk

Volatility, as seen through the VIX, hit its lowest point since 2019. And it’s really of no surprise, given the recent two-month, 15%+ rally in the S&P 500. The question is, will complacency continue to dominate the VIX, and if so, for how long?

We are starting to see lots of mixed signals. While sentiment has shifted to the bull side, and quite quickly, the “bandwagon” effect is rearing its head. And while it will be an interesting battle between the bulls and bear going forward, there is no doubt complacency is currently dominating the psyche of market participants and this is clearly seen through the “performance” of the volatility gauge. So, for those that use options selling strategies, opportunities become more challenging. Remember, volatility is a major component of the options pricing model, so when volatility is low, so are options prices (premium).

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 December 18, 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

Bear Call Spread: SPY January 19, 2024, 475/480

Original trade published on 12-1-2023 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 458.50. We sold the January 19, 2024, SPY 475/480 bear call spread for $0.75. The expected range or move was 442 to 472. The probability of success at the time of the trade was 82.51% on the call side.

Current Thoughts: SPY is roughly $11 higher since we added our bear call spread. As a result, our probability of success on the trade stands at 57.31%. The price of the bear call spread is currently $1.95, very close to our stop-loss area of roughly $2.25. We need to see a short-term pullback to get this trade back on the dancefloor.

Call Side:

As always, if you have any questions, please feel free to email me at andy@cabotwealth.com.

The next Cabot Options Institute – Quant Trader issue will be

published on December 26, 2023.