COI Quant Trader Issue: March 18, 2024

Weekly Commentary

We are finally through March expiration and volatility continues to remain at low levels. Volatility is starting to perk up a little, but the VIX still sits below 15, at 14.41. Until we see a sustained push towards the 18 handle, we should expect to see market complacency rule the day. A return to more normal levels of volatility (18 to 22) would allow us to expand our positions. Until then, we patiently wait for Mr. Market, and more importantly, probabilities, to lead the way.

After a tough bout with sequence risk over the past several trades, it seems as though the probabilities might have shifted in our favor. Time will tell, but it’s nice to finally be sitting on a profitable trade in our most recent bear call spread in SPY. I intend to lean a little more bearish over the next expiration due to all the factors we discussed in our latest subscriber-only webinar. I also intend to add a trade that should take advantage of volatility expansion over the next several months, but we need to spend a few days above 15 before I even think of pulling the trigger.

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

Current Portfolio

Volatility Matrix

IV Ranks remain low across our watch list with few exceptions. BITO still offers an incredibly high IV and could be an interesting play. SMH is the other highly liquid ETF that offers a very high IV Rank.

When looking at the other ETFs, my preference would be to use a strategy that takes advantage of cheap premium and potential volatility expansion … a bear put spread or bull call spread comes to mind, with the former being the preference. These are debit spread strategies that I might employ as a mix to our predominantly premium selling strategies and to play a potential volatility expansion as we move ever closer to the November elections.

Volatility Talk

After another brief stint above 15, the VIX closed the week at 14.41. The song continues to remain the same. The VIX remains complacent and will be so until we see a sustained push to the 18-20 level and even then we are just entering “normal” levels of volatility. Remember, with an election in the not-so-distant future and in the midst of seasonal weakness, I do expect volatility to see a climb towards normal levels (18-20). As I’ve stated for weeks, it’s my plan to add a volatility-based trade to take advantage of any volatility expansion over the course of the next eight to 10 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 March 18, 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

Bear Call: SPY May 17, 2024, 535/540

Original trade published on 3-13-2024 (click to see original alert)

Background: At the time of the trade, SPY was trading for roughly 516.14. We sold the May 17, 2024, SPY 535/540 bear call for $1.33. The expected range or move was 495 to 537. The probability of success at the time of the trade was 72.31%.

Current Thoughts: The SPY now sits at 511.43, roughly $5 lower than when we placed the trade. With 61 days left until the end of the May 17 expiration, SPY sits well below our short call strike of 535. Our probability of success now stands at 80.27% and our bear call spread is currently worth $0.98. We could lock in a small profit here of 7.5%, but I intend to lock in a return when our spread is only worth $0.65 to $0.35.

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 March 25, 2024.

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