When Does Your Opinion on the Market Matter?
Only if it's wrong...
Last week, I wrote about being Bullearish. My post, The Art of Being Bullearish (now fully unlocked for all readers), generated a lot of private comments. One stood out - “Every time I think the market is going one direction, it goes the other way!”
Yep - been there, done that. I’ve been trading options for more than fifteen years. Long ago, I used to trade directionally based on a strong opinion. It drove me crazy to be 110% sure a stock would go up, only to see it go down. I would pound my head against the wall and scream, “why, why, why!”
I have found that I am much more successful (perhaps more mature) by NOT trading my opinion, but being flexible in changing opinion. I trade either the charts based on a hard, rules based, mechanical system or a well researched non-directional/directional system based on historical behavior of implied volatility in and around earnings releases.
I was amused to read various Twitter posts over the weekend that “Everybody is short!” Indeed, as I write this post at 9:30 PM on Sunday evening Wall Street Time, the S&P futures are down over 1%. Cool - my non-directional trades in play should get a nice IV boost as they are getting closer and closer to ER.
This coming week as well as this coming month is a time for caution. Historically/Seasonally, September is a rough month for the market. Careful - that can also lead to an opinion (bias) to the down side. It is okay to be bearish, but be bearish for the right reasons…
The following daily chart shows me technical reasons to be bearish if we get confirmation. It closed below the 48 eMA (as well as the 50 sMA) on Friday as well as below the Support Zone between the 38.2% - 50% Fib retracement from the peak in early January to the low of mid June. The most recent pivot high happened near 61.8% and the 200 sMA. The chart tells me that if it continues to print bearish candles, SPY will head to, “in my opinion” the $390 to $400 area in what is potentially the bottom side of a triangle. As soon as I add “in my opinion” I could be wrong. The chart tells me where it is going, my opinion tells me I could be wrong.
I could be wrong. So be it.
I only want to take directional trades if I can make at least a double on my full paper risk or more if it reaches a technical target. But… If I am wrong, I want to cut my trades the second I see that I am wrong. Ideally, my loss will a lot lower than my potential gain. The stats for Summer ER Season, the subject of all alerts for premium subscribers of this service tell me how often I was wrong (win/loss ratio) as well as the consequences of all trades (profit factor).
There are two trades in play as announced to premium subscribers last Sunday, August 21st - HPQ and OKTA pre-ER straddles. A historical analysis of both of these tickers showed that an at the money weekly straddle bought 7 days before ER for HPQ and 9 days before ER for OKTA and both sold just before ER announcement were profitable 100% of the time over the last four ER’s. Profitability results from both a directional move (up or down) and increased IV. HPQ’s results were as follows.
Note that this is NOT a new opportunity. Four contracts for a total cost of $1,040 were entered on Tuesday, August 23rd. I position sized with a higher amount of capital with the understanding that if the historical drawdown percentages remained consistent, I would not see a large loss. However, I do have a stop in place that will sell the position at a $250 loss. The stock has started moving directionally and IV has started to pick up. As of Friday last week, here is the play…
Note that IV has also started to pick up.
Risk graphs courtesy of TomsOptionTools.
The HPQ straddle will be exited in the last hour of Tuesday, August 30th - just before it’s earnings announcement after close.
Below is HPQ’s entry into TraderSync. As most know - I’m an affiliate of TraderSync because this journaling software is awesome and I use it heavily to help me be a successful trader.
OKTA is also currently in play, but in a drawdown phase. It hasn’t hit my max $250 loss yet. Here is it’s entry into TraderSyc (which by the way has a screenshot of its historical results so that I can go back next ER season revisit the play for a repeat. HPQ in TraderSync has the same):
The other pre-announced earnings plays last week were, as usual great performers…
SPLK 24 Hour Earnings Iron Condor. On Wednesday, 4 x SPLK Aug19 $99/100/122/123 Iron Condors were entered for $0.43 each ($.57 risk). SPLK gapped down below $100 and stayed there after open. IV crushed, but by moving past my short strike, the play was in loss. I announced to premium subscribers at 10:22 AM on Thursday morning that I was exiting the put portion of the iron condor and leaving the call portion to eventually expire worthless. Total loss on $228 risk was $48. So be it.
NVDA 24 Hour Earnings Iron Condor. On Wednesday, 1 x NVDA Aug19 $157.50/160/185/187.50 Iron Condors were entered for $0.73 each ($1.77 risk). NVDA barely moved and stayed in the profit zone all day on Thursday and IV crushed by the end of the day. I bought back the iron condor for $0.20 for a $0.53 profit.
ULTA pre-ER directional (combo of historical move up + IV increase). On Wednesday I announced to premium subscribers that I was buying (per plan) 1 x ULTA Aug19 $420 call. I ended up buying for $9.60 and set a stop loss for $7.10 ($250 loss if triggered). The categorical plan was to sell the position EOD the following day on Thursday before close and ER. I sold for $13.00, a nice $340 profit, at 3 PM (perhaps a little early as I coulda, woulda, shoulda sold near close for $13.15). No complaints…
MRVL 24 Hour Earnings Iron Condor. On Thursday, 3 x NVDA Aug19 $49/50/60/61 Iron Condors were entered for $0.30each ($0.70 risk). MRVL barely moved after open, however started dumping with the overall market weakness. It was still in the profit zone and IV had crushed by noon. I alerted premium subscribers that I was exiting for a profit at 12:18 just in case downward momentum picked up. I was able to buy back the put portion for $0.05 and let the call portion expire worthless for a $0.25 profit per contract. Nice win…
WDAY 24 Hour Earnings Iron Condor. This is a “coulda, woulda shoulda” trade. I didn’t enter as the total risk was over my $250 threshold on this type of earnings strategy. See my YouTube video on Iron Condors here. If I had entered as planned on Thursday, I would have bought 1 x WDAY Aug19 $143/148/175/180 Iron Condor for $1.53 each ($3.47 risk). WDAY barely moved after open and IV crushed. This trade would have expired worthless on Friday.
Summer 2022 Earnings Season is nearly finished. However, there are stragglers out there for the next couple of weeks. Next week we have three historically consistent plays. Each are noted below for premium subscribers.
Earnings Iron Condors
CRWD
Entry: Tuesday, 30 Aug (Past performance 4 out of 4 wins), Exit: EOD on Wednesday, 31 Aug
OKTA
Yes - we are already in a straddle, which will be exited just before ER. But I will aslo play an IC. Entry: Wednesday, 31 Aug (Past performance 3 out of 4 wins), Exit: EOD on Thursday, 1 Sep
Directional Pre-ER
ORCL
Puts - Sep16 expiry, Delta 25 to 40 depending on volume. Entry: Friday, 2 September (Past performance 4 out of 4 wins for an average of 106.28% ROI per trade), Exit: EOD on Monday before ER, 12 September. Note - I will position size to $1000 with a $250 stop.
ORCL entry...
https://shared.tradersync.com/ricepirate/b7e9b5b6-2b28-11ed-9bfe-061a3d52649f?ref=https://www.tradersync.com/?ref=michaelkuhns
Full loss on OKTA. I was assigned my short $83 puts. I had to exercise my long $82 puts. Total loss was $195. Happens.