Since last week’s issue we locked in another profitable trade, this time in XOP.
Convenient timing on our part allowed us to take a 15.2% return on the trade. We had sold the July 15 190/195 bear call spread for $0.70 on June 8. By June 17 our 190/195 bear call was worth less than $0.05, so we decided to lock in some profits and move on to the next opportunity. With 28 days left until expiration it just doesn’t make sense to hold any risk to try and make an additional $0.05, if we have the potential to simply take profits off the table.
Cabot Options Institute – Quant Trader Issue: June 24, 2022
Since last week’s issue we locked in another profitable trade, this time in XOP.
Convenient timing on our part allowed us to take a 15.2% return on the trade. We had sold the July 15 190/195 bear call spread for $0.70 on June 8. By June 17 our 190/195 bear call was worth less than $0.05, so we decided to lock in some profits and move on to the next opportunity. With 28 days left until expiration it just doesn’t make sense to hold any risk to try and make an additional $0.05, if we have the potential to simply take profits off the table.
With two trades under our belt, so far, so good. It certainly beats starting out the exact opposite. While the initial streak can be exciting if it continues to build, just know losses will come. Understand that probabilities will take over. Statistics give you the road map. It’s how you decide to manage your risk that truly leads to success over the long term. It’s the one thing that seemingly no one talks about, yet it is the most important aspect of trading.
After a small hiatus to allow the market to work some kinks out, I decided to step in a trade Wednesday. At the time, volatility, as seen through the VIX, was hovering around 30 so it was a great time to take advantage of the persistent inflated options premium that we’ve seen throughout 2022.
I wanted some bearish exposure after the rally early in the week, so I decided to sell the SPY July 29, 405/410 bear call spread for $0.75. I’ll discuss the trade in greater detail in the Weekly Trade Discussion below.
I actually hope to get some bullish exposure, potentially in an energy stock, early next week. Both energy stocks and gold stocks have taken a beating as of late and pushed into an oversold state, so a potential bull call spread looks like it could be in the cards.
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 given the challenging market since we initiated the Quant Trader service I’ve chosen to navigate cautiously.
My intent next week is to open at least two to three more trades, but we need a cooperative market. As I stated last week, I’m never going to force a trade purely for action. It doesn’t make sense. 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 | 7/29/2022 405/410 | $0.75 | $0.79 | -0.80% | 84.42% | -4 |
| Closed Trades | |||||||
| Open Date | Closed Date | Ticker | Strategy | Trade | Open Price | Closing Price | Return |
| 6/2/2022 | 6/13/2022 | SPY | Bear Call Spread | 7/15/2022 440/445 Calls | $0.70 | $0.05 | 14.94% |
| 6/8/2022 | 6/17/2022 | XOP | Bear Call Spread | 7/15/2022 190/195 | $0.70 | $0.04 | 15.21% |
Volatility Talk
Volatility, as seen through the VIX, fell 11.8% over the past week. It currently sits at 29.05.
As I wrote last week, if the VIX reverts back to the mean, we would sell some more bear call spreads, and that is exactly what occurred. SPY rally early in the week and we decided to sell some 405/410 bear call spreads going out 37 days. And I’ll continue to sell them every time we see the VIX hit those levels, knowing of course that it will eventually pierce the 35 to 38 level, but with an increased margin of error and proper risk management we are fine taking on those opportunities.
Volatility is still well above normal levels, so selling premium makes perfect sense, especially when using 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.
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 June 27, 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 | 73.1 | 67.1 | 62.8 |
| ProShares Bitcoin ETF | BITO | 111.5 | 54 | 25.7 |
| SPDR Dow Jones | DIA | 25.1 | 59.6 | 41.8 |
| iShares MSCI Emerging Markets | EEM | 25.3 | 42 | 38.7 |
| iShares MSCI EAFE | EFA | 23.7 | 45.8 | 29.9 |
| iShares MSCI Mexico ETF | EWW | 29.7 | 52.3 | 31.3 |
| iShares MSCI Brazil | EWZ | 39.6 | 55.5 | 15 |
| iShares China Large-Cap | FXI | 38.9 | 40 | 56.5 |
| VanEck Gold Miners | GDX | 41.1 | 61.8 | 28.8 |
| SPDR Gold | GLD | 18.3 | 23.9 | 43.1 |
| iShares High-Yield | HYG | 17 | 66.7 | 41.7 |
| iShares Russell 2000 | IWM | 34.8 | 71 | 41.5 |
| SPDR Regional Bank | KRE | 34 | 45.2 | 32.9 |
| VanEck Oil Services | OIH | 59.3 | 78.6 | 19.8 |
| Invesco Nasdaq 100 | QQQ | 35.1 | 75 | 48.3 |
| iShares Silver Trust | SLV | 31.9 | 32.7 | 34.2 |
| VanEck Semiconductor | SMH | 43.9 | 68.5 | 33.3 |
| SPDR S&P 500 | SPY | 28.4 | 67.1 | 42.7 |
| iShares 20+ Treasury Bond | TLT | 22.6 | 60.7 | 56.8 |
| United States Oil Fund | USO | 50.6 | 34.2 | 21.8 |
| ProShares Ultra VIX Short | UVXY | 116.4 | 5 | 44.7 |
| CBOE Market Volatility Index | VIX | 103.8 | 13.4 | 47.5 |
| Barclays S&P 500 VIX ETN | VXX | 76.4 | 0 | 43.4 |
| SPDR Biotech | XLB | 30.1 | 63.4 | 16.8 |
| SPDR Energy Select | XLE | 50.7 | 85.4 | 20.3 |
| SPDR Financials | XLF | 31.5 | 52.2 | 30.4 |
| SPDR Utilities | XLU | 24.1 | 63.8 | 45.3 |
| SPDR S&P Oil & Gas Explorer | XOP | 62.3 | 61.9 | 18.3 |
| SPDR Retail | XRT | 44 | 68.5 | 48.9 |
Stock Watch List- Trade Ideas
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| Apple | AAPL | 38.1 | 61.4 | 51.8 |
| Bank of America | BAC | 44.8 | 59.3 | 33.3 |
| Bristol-Myers Squibb | BMY | 23.1 | 25.2 | 72.1 |
| Citigroup | C | 46 | 74 | 35.3 |
| Caterpillar | CAT | 44.7 | 90 | 16.4 |
| Comcast | CMCSA | 35.5 | 51.8 | 36.1 |
| Costco | COST | 34.4 | 45.3 | 62.1 |
| Cisco Systems | CSCO | 31.2 | 41.2 | 35.7 |
| Chevron | CVX | 47 | 91.2 | 20 |
| Disney | DIS | 38.8 | 38.4 | 29.6 |
| Duke Energy | DUK | 24.5 | 20.2 | 49.6 |
| FB | 44.9 | 43.5 | 32.3 | |
| Fedex | FDX | 53.7 | 80.1 | 57.7 |
| Gilead Sciences | GILD | 30.1 | 17.5 | 65.3 |
| General Motors | GM | 51.1 | 64.2 | 40.5 |
| Intel | INTC | 38.3 | 54.4 | 30.3 |
| Johnson & Johnson | JNJ | 22 | 6.8 | 71.3 |
| JP Morgan | JPM | 39.7 | 66 | 30.9 |
| Coca-Cola | KO | 27.7 | 64.8 | 58 |
| Altria Group | MO | 37.4 | 74.5 | 20.7 |
| Merck | MRK | 23.9 | 32.1 | 73.7 |
| Morgan Stanley | MS | 43.8 | 18.4 | 30.3 |
| Microsoft | MSFT | 35.1 | 49.1 | 55.7 |
| NextEra Energy | NEE | 33.9 | 29.5 | 62.3 |
| Nvidia | NVDA | 58.5 | 44.4 | 41.8 |
| Pfizer | PFE | 31.7 | 48.9 | 54.5 |
| PayPal | PYPL | 67.2 | 69.4 | 39.9 |
| Starbucks | SBUX | 37.2 | 65 | 55.1 |
| AT&T | T | 32.9 | 60.3 | 61.3 |
| Verizon | VZ | 26.6 | 53.8 | 73.4 |
| Walgreens Boots Alliance | WBA | 37.7 | 73.9 | 49 |
| Wells Fargo | WFC | 48.7 | 57.1 | 29.5 |
| Walmart | WMT | 26.9 | 6.2 | 56.2 |
| Exxon Mobil | XOM | 48.4 | 19.6 | 29.3 |
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 has rallied slightly since we initiated the trade.
SPY is now trading for 378.06. As you can see in the image below, our probability of success now stands at 84.06% and our probability of touch is 32.55%. The spread is currently trading for roughly $0.79.
No worries here. We are still safely below our short call of 405. Our delta sits at 0.18 and again, our probability of success is still above 84%.
Bear Call
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 1, 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.