COI Quant Trader Issue: November 6, 2023

Weekly Commentary

We took our first loss since early July and, admittedly, I thought we were in for a nice return. The five-day, snapback rally of 6%+ last week caught everyone off-guard. Yes, we all knew we were in short-term oversold territory, so a push higher was anticipated, but certainly not on the magnitude of 6%+.

At the time of the trade, with 21 days left until expiration, our probability of success on the trade was 86.76%.

But look at the probabilities going out just 7 days. There was only a 4.57% chance of SPY touching 430 and less than a 3% chance (100% – 97.68%) that SPY would actually finish above that level at the close last Friday. SPY closed at 434.69. And even if SPY had pushed as much as 3% higher, we would still be on the dance floor as time decay would have really helped us out with the VIX falling below 15 at the close on Friday.

It’s just another reminder to keep risk management at the forefront of all your trading/investment endeavors … starting with a consistent and disciplined approach to position size.

I plan on adding one, if not two, positions early this week to take advantage of the two upside gaps in SPY which have resulted in the short-term extreme overbought readings over various time frames in numerous ETFs and stocks.

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

Current Portfolio

Volatility Talk

Volatility took a tumble last week closing the week out just below 15, at 14.91. Now the “fear gauge” is in short-term oversold territory. Of course, I wouldn’t be surprised to see the VIX test the lows established in October before a “reversion to the mean” event occurs. Given all the geopolitical turmoil, etc., I wouldn’t think sitting at current levels (or lower) will last … just a worthless hunch.

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 6, 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: SPY December 15, 2023, 450/445 – 380/375

Original trade published on 10-31-2023 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 418. We sold the December 15, 2023, SPY 450/445 – 380/375 iron condor for $0.77. The expected range or move was 398 to 438. The probability of success at the time of the trade was 89.45% on the call side and 88.67% on the put side.

Current Thoughts: At the time of the trade SPY was trading for 418 and now it sits at 434.69. Admittedly, we are early in the trade, but our probability only sits at 67.77% on the call side, but a comfortable 95.38% on the put side. We will need to keep a close eye on the call side of the trade just in case SPY continues to rally.

Call Side:

Put 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 November 13, 2023.