Optimism and The Chop

Earnings Price Action

Optimism and The Chop

 

MARKET OVERVIEW
As is widely known, short weeks can be odd in the stock market. Last week featured a certain amount of bullish activity and bullish hope that hasn’t been commonplace as the S&P had endured seven straight red weeks. After closing strong last week, Tuesday seemed to hold the line. Wednesday failed to make new highs and closed lower, and Thursday proved to be a strong day with the SPY ETF closing above $417. Sure, that might not have been exciting months ago during the bull market of yore; however, of recent times, this is a good showing of continued strength. The question still permeates all corners of the trading and investing world…is this a technical relief bounce with further downside to come later this summer or could this possibly be up from here? No speculation here…we at BlackBoxStocks have learned from experience to simply wait and read the story the charts tell us. There was a lot of bullish bias going into Friday morning so, of course, SPY opened Friday with a sell off and a failed afternoon attempt to push back up to finish the short week at $414.04. The $425, or even $430, that some people were betting on just wasn’t meant to be. Not this week. This week was a reminder that chop is to be avoided unless one is skilled in it.

 

INSIDE THE BOX
We are constantly welcoming new members and working on new features for those members. Three new features debuted this week for our members including Dollar Flow, Options Sentiment by Strike, and Options Open Interest Details. These are powerful new studies our members now have access to. We have a new full function mobile app, and next week will feature an in-depth write up about it on this blog. However, suffice it to say that the much improved mobile experience is a thing of beauty. As new members are joining our ranks, the moderators in our trading rooms were helping members navigate several waters this week. One event was the Gamestop earnings report, which was released on Wednesday.

Many a time we have preached our belief that buying options to hold through an earnings report in hope of a large directional move is a form of gambling featuring very long odds for the option buyer. If one is inclined to buy options before an ER, simply be aware that it is gambling. And also be aware that implied volatility (known throughout the land as “IV”) is constantly not on your side. If you are selling options in a high IV environment, however, IV is your very good friend. Gamestop’s ER release is a good case in point. The day before GME released its ER, short-term calls and puts were featuring IVs of 350%. Anything above 30 or 40 percent is typically considered elevated. Since the IV was so high, the prices of the options were elevated. So let’s look at the case of selling puts in this environment.

Elevated IV will increase the options price, so option sellers want to take advantage of the “IV crush” that so often happens after earnings. If one is selling puts, remember he wants the price of the put to fall from where they sold it. The paradigm is still “buy low, sell high” but the order of operations is simply reversed. So if a trader sells a put for $.95 during an IV spike, he will hope either the underlying price will rise or the implied volatility will decrease drastically. This IV drain will lower the option price (as will, of course, the underlying price increasing). That will enable the trader to buy back the option he wrote at a much lower price than he sold it for. The net result is profiting during a high IV environment as an option seller!

 

TAKEAWAY
Learn both the long and short sides of options trading. There are plentiful ways to profit with a small cash account. Also, be aware that BlackBoxStocks is constantly innovating to bring you new tools and features such as the new Dollar Flow, Options Sentiment by Strike, and Options Open Interest Details studies. Much more details will be provided on the new app and these new studies in next weekend’s Sunday blog. Until then…stay focused, stay disciplined, and stay green!