Volatility continues to rule the roost.
And this past week it seems as though the bears, after a brief hiatus, made an appearance, pushing the S&P 500 ETF (SPY) lower by 3.3%.
Since last week’s issue we added another trade, this time an iron condor in IWM. Volatility picked up a little bit towards the latter part of the week, so we decided to add an iron condor to the mix to take advantage of the inflated volatility. I discuss the trade in greater detail in the Weekly Trade Discussion.
Cabot Options Institute – Quant Trader Issue: July 1, 2022
Volatility continues to rule the roost.
And this past week it seems as though the bears, after a brief hiatus, made an appearance, pushing the S&P 500 ETF (SPY) lower by 3.3%.
Since last week’s issue we added another trade, this time an iron condor in IWM. Volatility picked up a little bit towards the latter part of the week, so we decided to add an iron condor to the mix to take advantage of the inflated volatility. I discuss the trade in greater detail in the Weekly Trade Discussion below.
I mentioned possibly stepping into a gold or energy position in last week’s issue and thankfully decided against it when the week began. I still think there might be an opportunity in GLD or XOP not too far down the road. Another leg lower in either ETF and I might have to add a bull call to the mix. But as I’ve stated repeatedly over the past month, I intend to stay cautious and pick my spots carefully. I’m not in a rush. Why would I be? Trading isn’t about the number of trades, it’s about the quality of the trade. It’s OK to lighten things up a bit from time to time.
As I’ve said in the past, my intent is to carry at least five open positions at all times, with the understanding that the number will fluctuate from time to time. But again, given the challenging market since we initiated the Quant Trader service I continue to navigate cautiously.
My intent next week is to open at least one to two more trades, but we need market confirmation. Allow the trades to come to you. Wait for the setups. Be patient!
Current Portfolio
| Open Trades | ||||||||
| Open Date | Ticker | Strategy | Trade | Open Price | Current Price | Current Return | Current Probability | Delta |
| 6/22/2022 | SPY | Bear Call Spread | July 29, 2022 405/410 | $0.75 | $0.79 | 2.88% | 88.17% | -3 |
| 6/30/2022 | IWM | Iron Condor | August 19, 2022 195/200 - 145/140 | $0.70 | $0.68 | 0.40% | 94.19% (call) - 84.33% (put) | |
| Closed Trades | |||||||
| Open Date | Closed Date | Ticker | Strategy | Trade | Open Price | Closing Price | Return |
| 6/2/2022 | 6/13/2022 | SPY | Bear Call Spread | July 15, 2022 440/445 Calls | $0.70 | $0.05 | 14.94% |
| 6/8/2022 | 6/17/2022 | XOP | Bear Call Spread | July 15, 2022 190/195 | $0.70 | $0.04 | 15.21% |
Volatility Talk
Volatility, as seen through the VIX, fell a paltry 1.2% over the past week. It currently sits at 28.71.
There is no doubt we’ve seen historic volatility in 2022. Just in the past month we’ve seen the S&P 500 advance/decline by more than 5% on four different occasions. To put it into perspective, we haven’t seen similar volatility over that same time frame since 1928.
So, nothing has really changed. We will continue to remain cautious and pick our spots While we don’t want to blindly sell premium, we do want to sell premium and as much of it as we can. As I’ve been screaming all year, volatility remains in a bull market and as a result we want to take advantage of the inflated levels of volatility by selling premium using a variety of credit spreads.
I’ll continue to use the heightened volatility as a source to increase our margin of error and not necessarily our premium. I’m fine maintaining the goal of 10% to 25% per spread trade, especially if I’m able to increase my margin of error … and that’s exactly what inflated levels of volatility allow us to do. I’ll plan to discuss this and much more in our upcoming live analyst briefing with Q&A.
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 4, 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
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| ARK Innovation ETF | ARKK | 74.1 | 67.1 | 41 |
| ProShares Bitcoin ETF | BITO | 112.3 | 59.8 | 18.2 |
| SPDR Dow Jones | DIA | 24.9 | 56.2 | 43.1 |
| iShares MSCI Emerging Markets | EEM | 25.2 | 32.5 | 43.2 |
| iShares MSCI EAFE | EFA | 24.9 | 45.9 | 38.3 |
| iShares MSCI Mexico ETF | EWW | 27 | 22.4 | 42.9 |
| iShares MSCI Brazil | EWZ | 39.4 | 57.1 | 28.2 |
| iShares China Large-Cap | FXI | 37.7 | 33 | 62.1 |
| VanEck Gold Miners | GDX | 42.2 | 63.9 | 22.7 |
| SPDR Gold | GLD | 19.5 | 28.9 | 31.8 |
| iShares High-Yield | HYG | 18.6 | 69.2 | 33.9 |
| iShares Russell 2000 | IWM | 33.7 | 65.2 | 39.9 |
| SPDR Regional Bank | KRE | 33.2 | 44.3 | 38.9 |
| VanEck Oil Services | OIH | 58.3 | 64.5 | 35.7 |
| Invesco Nasdaq 100 | QQQ | 36 | 75.5 | 40.5 |
| iShares Silver Trust | SLV | 33.3 | 34.3 | 21.9 |
| VanEck Semiconductor | SMH | 45.2 | 67 | 32.5 |
| SPDR S&P 500 | SPY | 28.9 | 64 | 40.9 |
| iShares 20+ Treasury Bond | TLT | 22.6 | 57 | 61.4 |
| United States Oil Fund | USO | 48.3 | 34.1 | 36.1 |
| ProShares Ultra VIX Short | UVXY | 110.3 | 1.6 | 46.6 |
| CBOE Market Volatility Index | VIX | 91.7 | 8.4 | 50.2 |
| Barclays S&P 500 VIX ETN | VXX | 67.9 | 0.7 | 44.4 |
| SPDR Biotech | XLB | 30 | 53.4 | 28.7 |
| SPDR Energy Select | XLE | 49.4 | 78.3 | 32.4 |
| SPDR Financials | XLF | 30.7 | 47.5 | 38.2 |
| SPDR Utilities | XLU | 22.9 | 54.4 | 62 |
| SPDR S&P Oil & Gas Explorer | XOP | 60.5 | 53.2 | 28.7 |
| SPDR Retail | XRT | 43.6 | 60.9 | 30.9 |
Stock Watch List- Trade Ideas
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| Apple | AAPL | 43.7 | 70.7 | 44.8 |
| Bank of America | BAC | 42.9 | 55.4 | 24.1 |
| Bristol-Myers Squibb | BMY | 26.1 | 34.1 | 50 |
| Citigroup | C | 44.3 | 61.9 | 34.2 |
| Caterpillar | CAT | 44.8 | 86.6 | 25.6 |
| Comcast | CMCSA | 41.6 | 50.7 | 41.1 |
| Costco | COST | 34.8 | 44.1 | 60.1 |
| Cisco Systems | CSCO | 32 | 46.4 | 35.8 |
| Chevron | CVX | 45.1 | 82.7 | 31.4 |
| Disney | DIS | 41.6 | 46.5 | 35.3 |
| Duke Energy | DUK | 26.1 | 22.9 | 67.3 |
| Fedex | FDX | 41.3 | 49.8 | 44.7 |
| Gilead Sciences | GILD | 29.4 | 17.1 | 51.8 |
| General Motors | GM | 56.7 | 73.7 | 32.6 |
| Intel | INTC | 46.2 | 63.9 | 36.1 |
| Johnson & Johnson | JNJ | 23 | 8.8 | 53.9 |
| JP Morgan | JPM | 38.4 | 61 | 30.8 |
| Coca-Cola | KO | 28.5 | 56.8 | 62.6 |
| Altria Group | MO | 39 | 77.3 | 22.6 |
| Merck | MRK | 28.8 | 44.8 | 54.3 |
| Morgan Stanley | MS | 43.8 | 16.9 | 42.9 |
| Microsoft | MSFT | 39.4 | 55.4 | 47.7 |
| Nextera Energy | NEE | 34.2 | 27.9 | 59.9 |
| Nvidia | NVDA | 63.8 | 51.1 | 31.7 |
| Pfizer | PFE | 35.3 | 50.2 | 65.6 |
| Paypal | PYPL | 76.1 | 71.6 | 32.1 |
| Starbucks | SBUX | 38.4 | 77.9 | 55.5 |
| AT&T | T | 32.9 | 61.4 | 63.4 |
| Verizon | VZ | 26 | 59.4 | 52.1 |
| Walgreens Boots Alliance | WBA | 36.1 | 54.7 | 24.8 |
| Wells Fargo | WFC | 44.2 | 51.7 | 42.3 |
| Walmart | WMT | 27.1 | 7.1 | 44.5 |
| Exxon Mobil | XOM | 48.5 | 18.3 | 36.2 |
Weekly Trade Discussion: Open Positions
Bear Call Spread: SPY July 29, 2022, 405/410 calls
Original trade published on 6-22-2022 (click to see original alert)
Background: SPY bounced during the early part of the week so with the VIX still hovering around 30 and the IV rank sitting at a staggering 92.83, I decided to sell the July 29 SPY 405/410 bear call spread with 37 days until expiration.
At the time of the trade SPY was trading for 375.44. We sold the July 29, 2022, 405/410 bear call spread for $0.75 with an 84.94% probability of success. The probability of touch was 30.79%. The upward bound of the expected range was 401.
Current Thoughts: SPY sits roughly $2 above where we placed the trade just nine days ago.
SPY is now trading for 377.25. As you can see in the image below, our probability of success now stands at 88.87% and our probability of touch is 22.66%. The spread is currently trading for roughly $0.56.
No worries here. We are still safely below our short call of 405. The delta of our spread sits at 0.03 and again, our probability of success is still above 88%. I like our chances at the moment. Of course things can change quickly, but if we continue to see the market hover around this area or move lower, we should have the opportunity to take some decent profits off the table.
Bear Call
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). The 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: We just placed the trade on Thursday so there really isn’t much to discuss at the moment.
Next Live Analyst Briefing with Q&A
Our next live analyst briefing with Q&A is scheduled for next Wednesday, July 13, 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 8, 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.