I came into this week thinking that the market was experiencing a pretty tame pullback.
I was thinking that the “tameness” was evidence for a continuation higher. After all, if someone needed to sell or hedge before the election, then they probably have already.
So much for that idea. We are seeing a strong continuation to the downside as Europe locks down for round two of the virus that shall not be named.
(I try to not call it out so the big tech filters will let this communication through.)
Where do we stand now?
Back to the original thesis we had in August– the markets had gone parabolic and were going to knock out a trading range that would chop everyone up to death. It’s working pretty well!
Into this most recent move lower, the VIX pushed into 40. A VIX of 40 is usually a very, very bad thing… but remember that the options market is attempting to price in risk surrounding 3 things:
- Fiscal Deal
- The Virus that shall not be named
Risk 1 is pretty easy to figure out because the risk goes away in about a week. Risk 2 is harder simply because it’s politics, and it’s always messy. Risk 3 should get priced in about a month, if the numbers out of Europe follow the Gompertz curve that we saw in the Sunbelt case spike.
Oh, and I forgot to mention risk 4: earnings.
You’ve got 4 stocks: FB, GOOGL, AAPL, and AMZN that all report on the exact same day. That’s 50% of the Nasdaq market cap that could move big.
Right now, the best strategy is to take advantage of the elevated risk premia as it’s starting to generate a pretty good edge for us.
Trade #1: NKE
NKE is starting to pullback into its rising 50 day moving average and the first earnings pivot low. If it comes back to previous resistance then I want to be involved.
Expected Price: 120.11
Sell to Open NKE 20Nov20 110/105 Put Spread
Tier 1: Enter at 0.65, Exit at 0.09
Tier 2: Enter at 0.91, Exit at 0.09
Tier 3: Enter at 1.17, Exit at 0.09
Stop Out If Close Under 109.89
Trade #2: ZM
Looking for the first test of the previous range lows.
Expected Price: 469.09
Sell to Open ZM 20Nov20 420/410 Put Spread
Tier 1: Enter at 1.8, Exit at 0.4
Tier 2: Enter at 2.52, Exit at 1.02
Tier 3: Enter at 3.24, Exit at 1.34
Stop Out If Close Under 419.89
Spread Value before gap down:
Trade #3: UNP
UNP is oversold enough to justify a long here. It’s deeply oversold on a 2 week basis, and is coming back to the summer trading range. I’m not sure this is the exact bottom but it’s pretty close.
Expected Price: 174.58
Sell to Open UNP 20Nov20 160/155 Put Spread
Tier 1: Enter at 0.74, Exit at 0.01
Tier 2: Enter at 1.036, Exit at 0.236
Tier 3: Enter at 1.332, Exit at 0.302
Stop Out If Close Under 159.89