COI Quant Trader Issue: February 12, 2024

Weekly Commentary

Before I get started I wanted everyone to be aware that the next Quant Trader issue will go out next Tuesday (February 20) due to the upcoming market holiday on Monday.

Volatility continues to remain low as a result of the seemingly never-ending market rally. While all of our bullish positions in our other Cabot Options Institute services (Fundamentals, Income Trader, Earnings Trader) continue to thrive in this environment, anything with a bearish-leaning or hedge-based trade has struggled. But as I’ve stated numerous times in the past, that’s why we always want to diversify our strategies when approaching the market.

The plan remains simple. I continue to focus on balancing out the overall deltas of our current positions by adding a trade, most likely a bull put spread. I’ll be concentrating on sector ETFs and individual stocks as the major indices continue to see low levels of volatility.

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

Current Portfolio

Volatility Talk

We continue to be mired in the depths of low volatility. In fact, we are getting close to reaching two and a half months, or 72 days, of volatility readings, as seen through the VIX, where the investors fear gauge hasn’t pushed above 15. You have to go back to mid-October 2018 to witness such a stretch (66 days).

Now that we have reached 72 days below 15, the next area of focus is to see if the VIX can break its next longest streak of 115 days set back in early February 2018. The next notable level to watch would be a 115-day streak below 15 that ended on Feb. 1, 2018. Some of you may remember, a market-worrying episode known as “Volmageddon” took place a few days later, in February 2018. The event was created by the implosion of several short-volatility ETFs, triggering a more than 1,175-point drop in the Dow. At the time, this was the biggest daily point drop on record for the blue-chip gauge.

Now, while I don’t expect a similar near-term market-shaking event to occur, I do expect to see the VIX begin to rise over the next month or so, if not sooner.

As I’ve stated over the past few weeks and will state again, I do think implied volatility will increase going forward. In fact, we could be seeing some of the lowest levels of volatility for 2024. Since 1992, there have only been four years where the VIX has not pushed above 20. The long-term average, according to the CBOE, is 20. As I’ve written in the past few issues, I’m still looking at a variety of different volatility plays to take advantage of a potential pop in implied volatility over the next three to six months.

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 February 12, 2024.

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 March 15, 2024, 510/505 – 440/435

Original trade published on 1-16-2024 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 474. We sold the March 15, 2024, SPY 510/505 – 440/435 iron condor for $0.66. The expected range or move was 455 to 494. The probability of success at the time of the trade was 91.07% on the call side and 86.77% on the put side.

Current Thoughts: The SPY now sits at 501.20. With just over a month left until the March 15 expiration, SPY sits uncomfortably close to our short call strike of 505.

Next week will be the telltale sign as to whether we need to adjust our position or not. Admittedly, I might adjust regardless of which direction the market decides to move early next week. If an adjustment does occur I will most likely buy back the put side of my iron condor and sell another bull put spread at higher strikes to bring in more premium and lower the risk on the trade. That being said, with so much time left until expiration, we have the benefit of taking several different avenues with the aforementioned adjustment being our preference.

Call Side:

Put Side:

Bear Call: QQQ March 1, 2024, 445/450

Original trade published on 1-23-2024 (click to see original alert)

Background: At the time of the trade, QQQ was trading for roughly 422.16. We sold the March 1, 2024, QQQ 445/450 iron condor for $0.60. The expected range or move was 405 to 440. The probability of success at the time of the trade was 85.41% on the call side.

Current Thoughts: QQQ now sits slightly higher at 437.05. Our probability sits at 67.34% on the call side. There are 20 days left until our position is due to expire. If we see a move to the downside over the next week or so, we should be able to take off our trade for a nice return. If not, and QQQ continues to head higher, much like our SPY iron condor, we will need to make an adjustment.

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 February 20, 2024.

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