Okay, we have two trades in the books. Both bear call spreads due to expire on July 15, 2022. So, it’s no surprise to say we are leaning bearish at the moment. Our deltas reflect our current stance, and we’re OK with it. In fact, we might be leaning a bit bearish for a while.

There is a good chance I’ll be taking the SPY 440/445 bear call off the table for a nice profit early next week, if not prior to the publishing of this issue. We can lock in some early profits and it simply doesn’t make sense to hold any risk through expiration when we can lock in over 50% of the original premium sold back on June 2.

Cabot Options Institute – Quant Trader Issue: June 10, 2022

As for our XOP trade, well, it’s a bit early to discuss. That being said, early movement has been in our favor since the trade was initiated a few days ago. We sold the 190/195 for $0.70 and now it’s worth $0.60. Again, early, but I’m definitely not going to complain about the positive start.

I’ll discuss both trades in greater detail in the Weekly Trade Discussion section below.

Next week, I hope to add at least 2-3 new trades, especially if we are able to take our SPY, and possibly our XOP trade, off the table. My goal is to eventually ramp up to 5 to 8 ongoing positions keeping the deltas of the overall portfolio neutral to slightly bearish. Once we get to that level (which will hopefully be in the next week or two) we’ll start to discuss the Greeks of the overall portfolio a bit more, especially the overall delta and theta. Don’t worry, I won’t make it too technical; or, at least I’ll try not to!

Current Positions

Volatility Talk

After a slow drip lower since mid-May, the VIX finally saw new life on Thursday, pushing close to 9% higher to close at just over 26. The investor’s fear gauge is up 5.3% since this time last week.

As I stated last week, the VIX has come down significantly (almost 30%) since hitting the mid-30s in mid-May. But as long as the volatility index stays above 18, we can continue to sell premium without much thought. And I just can’t see volatility pushing significantly lower with so many glaring concerns out there, led by the relentless pace of inflation.

My assumption means very little. From a statistical standpoint, it’s a coin toss: I’m either right or wrong. This is the case for everyone. The odds are 50/50. That being said, I do think we are in a new phase for volatility. Given the shift in the global economy post-pandemic I don’t think it’s a stretch to say that we could see volatility stay well above normal levels for quite some time. But like all assumptions, only time will tell.

Current Positions

Weekly High Probability Mean Reversion Indicator

Below is my watch list of ETFs and stocks with the most liquid options for the week of June 13, 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

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	81.3	68.9	47.2
Proshares Bitcoin ETF	BITO	87.2	42.2	45.4
SPDR Dow Jones	DIA	22.7	34.4	39.7
iShares MSCI Emerging Markets	EEM	24.2	25.4	42.3
iShares MSCI EAFE	EFA	21.5	38	28.5
iShares MSCI Brazil	EWZ	27.9	42	21.1
iShares MSCI Mexico ETF	EWW	39.2	54.4	27.4
iShares China Large-Cap	FXI	37.8	39.8	57.8
Vaneck Gold Miners	GDX	38.3	44.6	34.1
SPDR Gold	GLD	16.7	16.2	47
iShares High-Yield	HYG	13.7	70.8	32.9
iShares Russell 2000	IWM	33.5	54.2	45.7
SPDR Regional Bank	KRE	29.8	27	37.1
Vaneck Oil Services	OIH	46.4	28.6	54.7
Invesco Nasdaq 100	QQQ	34.9	62	41.8
iShares Silver Trust	SLV	29.7	18.3	40.8
Vaneck Semiconductor	SMH	41.9	54.2	40.3
SPDR S&P 500	SPY	26.2	50.3	40.2
iShares 20+ Treasury Bond	TLT	21.5	53.1	37.9
United States Oil Fund	USO	46.8	31.4	74.8
Proshares Ultra VIX Short	UVXY	122.7	0.6	43.6
Barclays S&P 500 VIX ETN	VXX	89.5	9.3	50.5
SPDR Biotech	XLB	24.1	60.3	40.7
SPDR Energy Select	XLE	37.4	42.9	63.1
SPDR Financials	XLF	28.1	29.4	35.4
SPDR Utilities	XLU	21	72.2	31.7
SPDR S&P Oil & Gas Explorer	XOP	49.3	26	72.3
SPDR Retail	XRT	46.9	67.9	49.7

Stock Watch List

	Ticker Symbol	IV	IV Rank	HPMR Oversold - Overbought
Apple	AAPL	35.4	55.9	39
Bank of America	BAC	34.7	45.3	27.8
Bristol-Myers Squibb	BMY	25.8	25.9	49.5
Citigroup	C	35.2	49.9	34.1
Caterpillar	CAT	33	42.4	34.1
Comcast	CMCSA	29.1	33	37.1
Costco	COST	34.9	46.1	52.6
Cisco Systems	CSCO	27.4	29	36.2
Chevron	CVX	33.4	39.1	55.3
Disney	DIS	35	33.1	32.9
Duke Energy	DUK	22.6	50.4	28.1
Facebook	FB	47.2	75.5	54.7
Fedex	FDX	49.9	76.3	51.4
Gilead Sciences	GILD	28.8	8.2	25.9
General Motors	GM	44.5	46.8	39.8
Intel	INTC	33.3	47.8	24.6
Johnson & Johnson	JNJ	23	42.6	31.1
JP Morgan	JPM	30	50	38.7
Coca-Cola	KO	8.5	64.5	33.7
Altria Group	MO	30.6	47.4	17.9
Merck	MRK	24.5	32.1	25.9
Morgan Stanley	MS	15.6	52.9	34.4
Microsoft	MSFT	13.5	43.8	41.7
Nextera Energy	NEE	34.9	72.3	53.4
Nvidia	NVDA	56.9	43.6	45.3
Pfizer	PFE	34	45.9	38.3
Paypal	PYPL	62.4	60.7	47.1
Starbucks	SBUX	35.2	56.7	61.3
AT&T	T	25.9	41.9	47.6
Verizon	VZ	26.8	49.8	51.2
Walgreens Boots Alliance	WBA	34.1	59.3	31.7
Wells Fargo	WFC	35.2	41.6	31.5
Walmart	WMT	25.4	41.3	26.9
Exxon Mobil	XOM	34.6	38.7	69.1

Bear Call Spread: SPY July 15, 2022 440/445 callsWeekly Trade Discussion: Open Positions

Original trade published on 6-2-2022 (click to see original alert)

Current Comments: At the time of the trade SPY was trading for 410.57. We sold the July 15, 2022 440/445 bear call spread for $0.70 with an 86.56% probability of success. At the time the high side of the expected move was 436.

SPY is now trading for 401.44. Just last week the major market index was trading for over 417.

As you can see in the image below our probability of success now stands at 94.59% and our probability of touch is only 11.01%. The spread is currently trading for roughly $0.25.

At the moment, our trade is in great shape. In fact, it’s in profit-taking territory, so don’t be surprised to see a closing trade alert in the coming days if SPY continues to cooperate.

Some of you may ask, why not hold on to the trade? We could, but all statistics point to taking the profits off the table and reestablishing a position at a higher level of volatility, especially when we’ve reached our goal of locking in 50% to 75% of the original premium sold.

Call Side

Bear Call Spread: XOP July 15, 2022 190/195 calls
Original trade published on 6-8-2022 (click to see original alert)

Current Comments: XOP reached an extreme overbought state recently. Typically, when we see this level of extremes in a highly liquid ETF or stock a short-term reprieve is right around the corner. So, due to the short-term overbought extremes in XOP we decided to try and take advantage of the situation by placing a high-probability bear call spread in XOP.

At the time of the trade XOP was trading for 168.62. We sold the July 15, 2022 190/195 bear call spread for $0.70 with an 83.69% probability of success. At the time the high side of the expected move was 189.

XOP is now trading for 165.48. As you can see in the image below our probability of success now stands at 86.43% and our probability of touch is 28.16%. The spread is currently trading for roughly $0.60.

So far, so good. XOP has pulled back a bit over the past few days which means a good start to our bearish-leaning trade. Of course, XOP can push all the way up to 190 before a loss is in order. Of course, we will roll our position if the delta pushes to the mid-30s, but for now we are going to enjoy how the trade has shaped up so far, knowing that could change overnight.

But if we see a continuation of the recent pullback and we can take $0.35 out of the trade, if not more, I’ll gladly take some profits and move on to the next opportunity.

Until then we patiently sit back and wait for time decay, otherwise known as theta decay, to work its magic.

Call Side

Next Live Analyst Briefing with Q&A

Our first live analyst briefing with Q&A is scheduled for next Wednesday, June 15, 2022 at 1 p.m. ET. I will be discussing the options market, giving a detailed look at open positions, strategies used, and will follow up with live questions and answers. But I also want to take some time to go through the ins and outs of the service and what to expect going forward, so I’ll probably go a little longer than usual, possibly upwards of 45 minutes to an hour, potentially longer if we have lots of questions…and I hope we do. Register here.

The next Cabot Options Institute – Quant Trader issue will be published on June 17, 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.