Week of Oct10

Tuesday, October 12

I can’t trade much this week. My only active position is a small trade in SPY.

At about 12:30 Monday afternoon, SPY went 3d on the daily chart while simultaneously dropping below its opening price and the upper band of the descending-to-flat 8-day SMA bands. Over lunch, $SPY tried and failed to recover the low of the opening range. At 2:30, $SPY tested this area again from below and failed. I bought a short-dated Monday/Friday put Diagonal 436/434 for $1.09.

Here’s the original position. (The T+0 line is wrong due to funky vol data into the close. The trade isn’t wildly profitable, but it’s more profitable than these graphs suggest.)

This may not be an ideal VO directional play. The spread is narrow, which limits adjustment options. The long strike was also quite close to the money ($SPY was trading around $437), which limits the risk/reward. I chose this structure because although I was confident of another move lower, I was less confident about the amplitude of that move. The market felt uncertain, and there is a lot of consolidation to the left on the chart, making the next move harder to predict. Keeping the spread narrow reduced my initial risk, and keeping the long strike close to the market helped the spread to hold up better as the market chopped around. The trade-off is that this trade relies more heavily on time (theta) over direction (delta) than I usually like.

We quickly moved lower, closing around $434.60. I expected another leg lower, but I was reluctant to leave the trade unhedged and risk an overnight bounce off the weekly HB (about 434.00). So after the bell, I partially hedged the position by rolling the 436 call down to 435 for $0.45, which removed about 40% of the original risk from the position.

Here’s the hedged position. (Again, ignore the T+0 line.)

We moved lower again today, pushing below my short strike of 434, but I haven’t adjusted the position further. I considered rolling into a 434 calendar, but doing so would basically flatten my deltas, which I didn’t want yet.

Although the T+0 lines in these pictures are inaccurate, the trade is not as profitable as I’d hoped, and I think volatility behavior is to blame. I may have done better here if I had deployed a vertical structure rather than a diagonal one. We’ll see how it shakes out.

Wednesday, October 13

Well, that was bull-ish…? Strong drives lower found support at daily band/fib retracements. After the opening hour, the bulls pressed all day, recovering weekly HBs, closing green and above the hourly bands, which are now turning up. The $SPX finished 2d, but that’s a pretty bullish 2d candle! /ES finished 1 and just under the liquidity zone at 4355-4357. (NDX and /NQ managed to go 2u.)

You could argue that the upper wicks on $SPX and /ES are bearish failures to make new highs, but I’m inclined to disregard those wicks today. They were created entirely by a 1-minute algo spike on the release of FOMC minutes. If you ignore that event-driven algo activity, the daily is just a very bullish hammer that closed on its highs, above key resistance and the prior day’s HB. Convoluted enough for ya?

Friday is monthly OPEX, which means the rest of the week rests in the mysterious hands of the gamma gods. That said, today’s close was bullish enough for me to stop out of my $SPY shorts.

$SPY

I hedged my short-dated put diagonal after the morning drive lower found support. That position is now a 434 calendar expiring this Friday/Monday with less than 2 delta and almost 35 theta. It has has just $9 of original risk and $230 of potential reward. I’ll close this trade if we find value above the two-day high or below the daily bands.

Since my bias was short until mid-afternoon (when it became clear that we would close above the hourly bands), my other $SPY trades faired less well. I stopped out of a put debit spread I bought as the morning rally retraced into the weekly HB. I also stopped out of a very low-delta broken-wing put butterfly that I’d bought yesterday and should have closed for a profit this morning when I hedged my put diagonal.

Options Analytics Pro Tip: When trying to assess your realtime position on a risk graph, make sure the date for the risk model is set to *TODAY*. The “error” in the $SPY risk graphs I posted yesterday, which I attributed to bad vol data from the platform was in fact caused by me accidentally setting the modeling date to the previous day…. I’d like to extend my sincerest apologies to the TOS team and the entire TD Ameritrade family for any disparaging remarks I may have made in the heat of the moment. 🙃

OTHER TRADES

I missed a very bullish continuation day in $UPST, one of my favorite stocks to trade common. But I did initiate long stock positions in $MRNA and $ROKU. These were stock buys on breakouts, so not really VO playbook material, but I’ll share anyway.

$MRNA

$MRNA totally ignored the morning’s market weakness, breaking out of the rising hourly bands to break out of a nice bottoming pattern, above the weekly HB, and pushing through the declining daily bands. It gave back more of that drive than I had hoped in the afternoon, but the hourly bands remain bullish and I’m looking for continuation tomorrow.

$ROKU

ROKU is another big mover that’s had a rough few weeks, but it has been working on a very bullish consolidation for the past week, and it completed the pattern today. I bought some stock on the break over yesterday’s high and got a nice push into the close, finishing above last week’s high