In this 7 part video series, tickertank.com founder Nick Fenton explains his criteria for selling Naked Puts (short puts). Part 1 discusses the importance of using liquid options, and the preference of a diversified underlying.
It’s always nice to be right, especially when it has to do with the markets. Friday we blogged about the VIX, and today we opened our monitor to find that our prediction about a pullback in the VIX was 100% accurate. It feels good to be right, and better to be right almost immediately!
SPY (The S&P 500 ETF) is up a bit today, responding to a decrease in implied volatility. We see this not as a good sign for bulls, but as a portent to an impending decline. More on this after the holiday tomorrow!
We’re taking a look at GLD, the gold ETF, and wondering if there’s an opportunity to get long in this precious metal. As our general feeling is that the market will pull back at the start of the year, hedging instruments like treasury bonds and metals become an attractive play, since they typically perform inversely to the market during strong moves.
Here we’re seeing a security on a solid down-trend, and there’s really nothing to get excited about if you’re looking for an entry point. There may be slight support around $160, but that’s so recent that it’s hard to give it any weight. At the same time, we’re reluctant to put on a bearish position because of the aforementioned tendency to move against the market, which we expect will reverse course soon.
So, we’re filing this chart under “review’ and we’ll look at it next year, especially if we do get a market pullback and implied volatility increases a bit. If you disagree, please let us know in the comments - we’d love to hear your ideas here.
Financial Sector ETF XLF has had its biggest down day in 6 weeks today, and we’re looking at lower volume and market movement as the biggest reasons. We really like that it’s a pull-back towards an already-existing channel, and we’re excited to see what happens if the ETF breaks its 20-day simple moving average this afternoon.
As you can see in the picture, we’re predicting range bound movement between $16.50 and $15.50, with a possible drop all the way to $15.25. What we really look for in a move like this is a sustained drop of about $0.50, though the ETF may have trouble breaking its 50-day simple moving average.
If you want to trade this and you’re unsure what strategy to use, a debit strategy may be in order. In low-cost securities selling options is often not optimal, because there’s not enough premium to justify the risk that you take. Here a simple put spread, or maybe a put butterfly, could do the trick nicely.
Of course, we’ll let you know if we decide to publish a trade on this security. Until then, good luck!
We are bullish on UNG.
Why? The 200 Day Simple Moving Average tells the story.
When an SMA is relevant to a stock, it is a reliable technical indicator. There were two resistance pull backs off the 200 Day SMA (red ovals) before it finally managed to break through. It rallied nice after the break, but has since pulled back.
The SMA is now a support level (green oval). As you can see, UNG is holding well at so far and had a nice upside move today. Bullish.
We wrap up the first half of 20 on 20 with a surprised glance at the financial sector ETF, XLF. We predicted last month that financials would stay range-bound, between $15.50 and $16, and which it looked like we were right for a few weeks, we were ultimately proven wrong.
The ETF is now at annual highs, and we’ve got no sense for where it’s going. If our bearish market sentiment is correct we should see a pullback, and if you’re a “contrarian” trader you may consider taking some bearish debit trades. If not, you can stay back and wait until the ETF establishes a new trading range, which is what we’re likely to do.
Low-priced ETFs are nice for trading naked options as well, so if you were inclined you could consider selling a naked call above the ETF’s price. It’s not something we normally do, but there is enough precedent for this price level being the top of the range that a good argument could be made for selling over the top of it, especially since prices aren’t high enough to find a credit spread that meets our criteria.
As always, Options Strategy Alert members will get the first look at any new trade we put out, so be sure to sign up if you want to stay ahead of the pack!
We normally don’t put much stock into an ETF with 13% implied volatility (no pun intended!) but TLT’s price is so high, and its focus so important in the markets, that we have to follow it carefully. We recently drew a nearly year-long ascending triangle on this chart (you can see the end of it on the chart included), and the bond ETF has now broken downward, through the bottom of the triangle. That doesn’t necessarily mean that there’s a bearish drop coming, but it is a nice sign that a rise in bond prices may not be imminent.
Normally that would be good enough for us to enter a bearish spread trade, but we’re also pretty sure the major market ETFs are due for a correction, and TLT typically trades inversely to the markets. We may actually consider complimenting our market assumptions here with a bullish credit spread, with something like a 119/120 sold put spread, or something with similar strikes.
The point would be to add to the bearish positions in the market ETFs like SPY, IWM, QQQ, and DIA, while placing a high-probability, low-risk trade in a non-volatile product. If you want to make sure you get the trades when they come out, sign up here to become an Options Strategy Alert member!
SLV gives us one of the best examples of range-bound trading that we’ve seen. The stock has oscillated between support and resistance, using its moving averages as a guide for those ranges, at times. Now we’ve got a drop below the 200-day simple moving average for the first time since the summer. This isn’t a great sign if you own silver, so beware. We see a possible drop to $26 in the medium term, which would put us back in the range where SLV lived for most of the summer months.
If you’re looking to short the stock, a debit spread is a cheap way to do that without committing a ton of capital. Precious metals are volatile, and we recommend limiting risk if you’re going to enter a directional trade here. We’ll likely enter one of our own soon, so be sure you’re signed up as an Options Strategy Alert member to get the trade when it’s still shiny and new!
We wrote on Friday that we believe the US markets are due for a downturn once volume returns in January. Now it’s Monday afternoon and our minds haven’t changed, so we’re bringing the charts to back up our claim.
You can see IWM above - that’s the ETF for the Russell 2000 Index, a compilation of small-cap stocks listed in the US markets. This ETF usually leads the smaller (by number) indices in directional moves, so we’re paying close attention. Even though the long-term moving averages are ticking up, we see a downward channel, and combined with the charts from other market ETFs, we’re staying bearish.
No trades here, at least not yet, so keep your eyes peeled for our updates.
Here’s a nice look at the year-to-date chart of NASDAQ ETF QQQ, the main tracker of the technology industry in the American markets. We’re in a bit of an interesting spot in tech stocks - after AAPL crashed enormously, then recovered somewhat, the market seems to be a bit unsure of what to do with this industry.
As you can see here on the chart, QQQ is hanging out right on top of its 200-day simple moving average, a sign that the market feels like the industry ETF is priced fairly. There was a big of a jump today, pushing the price above the 50-day SMA for the first time since October 9th, more than two months ago. Bulls should see this move as encouraging, and we’re inclined to agree.
We think that QQQ may have another $1 move left in it before the end of the year, and could easily see a nice push as holiday-season sales push tech companies upward through the end of the year. Even without a big push upward, it’s hard to predict a significant drop in the near future based on this chart.
Major market ETF SPY is sitting almost exactly in the middle of a long-term upward-trending channel. On top of that, it’s just recently bounced off it’s 200-day simple moving average, and is now running up against the bottom of its 50-day simple moving average. We’re setting up for a potentially smaller near-term range while inside a longer-term range, which creates some interesting trading opportunities.
More to come soon - we may be looking into double diagonals early next week. Until then, enjoy the weekend!
EEM, the Emerging Markets ETF, has been really unpredictable within its range this year. That range is $36 to $44, but it’s been a guessing game as to where it would stabilize between those points. Right now we’re looking at a recent bump upward off the 200-day simple moving average, and a seemingly-meaningful support level at $40.
We tried a few different regression channels before settling for the one you see on the chart above. Each of them (varied based on starting point) gave us a mean around $40 for today - meaning that the push off from that level last week likely wasn’t a coincidence. If we were going to enter a trade in EEM we’d start at that point.
Since we’ve gapped upward to the 200-day SMA now, there could be an argument made that a return to $40 is imminent, though we don’t necessarily see it that way. If you wanted to be a little adventurous you could try a quick bearish debit spread, banking on a $1 move and the associated profits.
If a quick trade isn’t your style, the regression channel is pointed downward, meaning that a longer-duration bearish trade may also be reasonable.
We’ll revisit EEM in a few weeks when we get tired of trading tech stocks. In the meantime, you may want to sign up for our Options Strategy Alerts to make sure you don’t miss the trade when we send it out!
It was the best of trades, it was the worst of trades… a tale of two financial ETFs, one of which (TLT: 20-Year Treasury ETF) is a consistent source for good options trades, and the other (TBT: 2x Inverse Treasury ETF) is a consistent disappointment.
Take a look at the above charts. On the left is TLT, and you can see a pretty clear trend with nice upward-trending support and a few good looking setups. On the right side, TBT, which, even after a reverse split, continues to juke us out of our cleats every time we try to tackle it.
We’ve shown both to demonstrate how two ETFs can be linked to each other. Take a look at them as they trend over time - there’s absolutely inverse movement, and it makes sense that trading one should be a replacement for the other. As it turns out, the available strike prices in TLT and its relative (non-leveraged) consistency have made it an excellent product for trading credit spreads.
We’re looking at $121 as a very solid support level for TLT, and if we were going to enter a new trade in bonds we’d start at that level and move from there.
If you dig this analysis (and the really, really poor joke at the beginning) then give yourself an early Christmas gift and sign up for our Options Strategy Alerts here. 20 on 20 will continue today - enjoy!
Stop number three on this 20 on 20 merry-go-round is $XLF, the famous Financial Sector ETF. XLF has a reputation for being “volatile in a range”, meaning that it rarely breaks out of an upper or lower bound, but within those borders anything goes.
We’ve got a nice range drawn on this chart that has been useful in the past, with $16 being a meaningful resistance level. Below that, the 200-day simple moving average (traditionally an effective measure of the market’s value of the security) is floating upwards, at about $15 and change. This creates a dollar-wide range for expected prices in December, and gives us a starting place when looking for a trade.
We’ve seen a nice pop up early this week, which is in line with a ton of other stocks. What we’re not seeing is a decent options trade to go with it, which is a function of a low stock price (comparatively) and low implied volatility. Well, if you want to put a trade on XLF then you’ll have to get a little creative. We see the 15 put butterfly and 16 call butterfly as equally decent options - it just depends on which direction you think the stock will move before December expiration (hint: it could be both).
We’re moving on to other ETFs in the financial sector next, but before we go, we’ll leave you with this: sign up for the Options Strategy Alerts program from tickertank.com, and you’ll get frequent trade ideas, updates, and bad jokes from your favorite options analysts. (hint: that’s us!)
