COI Quant Trader Issue: November 27, 2023

Weekly Commentary

We have one open position with the intent of adding several more this week. I’ll be using our standard, highly liquid ETFs for one of the trades and a stock-based position as well. We haven’t dipped into equities much, but I expect to add a few of the most highly liquid stocks to our list of regulars.

As always, I want to keep our deltas balanced. At the moment we are leaning to the short side with our bear call in SPY being tested. As a result, we need to add some bullish exposure to even out the deltas … and possibly a skewed (bullish) iron condor. Of course, at extreme overbought levels it’s hard to justify adding too much bullish exposure, so a reprieve of the current overbought state would be ideal. If we continue to see a rally, we will most likely be exiting our bear call spread which will immediately flatten out our deltas again. At that point, we can start with a fresh new set of positions with a duration of 45 to 60 days.

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

Current Portfolio

Volatility Talk

The VIX continued to plummet last week closing at a multi-year low of 12.46. The new low displays the ongoing complacency in the market that has been prevalent since April. Even the recent three month sell-off (August to October) couldn’t push the VIX into “fear” territory. The question is, with all of the major indices in short-term overbought territory and an incredibly oversold VIX, will we see some “normalcy” return to the market? The recent rally has been sharp and fast with the S&P seeing gains of nearly 10% since the beginning of November, so a pullback is almost expected at this point.

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 November 27, 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 December 15, 2023, 456/461

Original trade published on 11-6-2023 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 435.36. We sold the December 15, 2023, SPY 456/461 bear call spread for $0.58. The expected range or move was 419 to 451. The probability of success at the time of the trade was 86.49% on the call side.

Current Thoughts: SPY now sits at 455.30. SPY’s relentless push higher since late October has pushed our probability of success from 86.49% to where it stands now, 49.76%. If we manage to see any decent downside from here, we should be able to get out of our position. Our bear call spread currently sits at $2.30.

SPY is currently in a short-term overbought extreme state, but it’s been sitting there for quite some time. I continue to expect a pullback to close at least one of the recent gaps, but the problem, at least for this position, is that we could see a continuation of this rally before a reprieve occurs. Regardless of my thoughts on the market, unless we see an immediate pullback, we will be forced to exit our position, take a loss and move on to the next opportunity.

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 4, 2023.