[Options] Not the Right Environment for Income Trades

Sean McLaughlin
February 20, 2019

With nearly 55 days until April expiration, this is the time I start looking at index and sector ETF’s for possibilities in selling delta-neutral income spreads.

This is an exercise I do every month where I analyze the current volatility priced into each of the most liquid optionable ETFs and measure where each ETF sits within its most recent 90 day trading range.

Well, this afternoon as I went through my monthly analysis, it was determined that out of all of the major ETFs that I follow not a single one offered appealing volatility to sell into and each ETF was trading near the upper or lower end of its most recent trading range. This tells me that ETFs are continuing to trend -- and a trend is not your friend when you are a delta neutral premium seller.

This is the first time in recent memory that I can remember such a situation happening where zero ETFs met my criteria for a delta neutral income trade. The recent one-way moves both down into Christmas and up since have left us premium sellers in a lurch.

Now, we can force the issue and try to pick an ETF that looks like it might be ready for a rest. But we here at All Star Charts would rather the market show us its hand instead of us force-fitting our narrative atop it.

After such a large up move in the market, it is now starting to show signs of possibly being extended and it feels like a really risky time to take short-term directional bets to the upside. However, on the flip side trying to get short feels akin to stepping in front of a freight train. So it is at times like these where we do nothing. Cash is indeed a position. As such, sometimes the best move is no move it all. Protecting our capital is job number one, and it is not mandated that we put our capital to work at all times in all environments.

Meanwhile, the whole All Star Charts team is heading up to Breckenridge this weekend for our annual Charts Summit where we will share our current thoughts on US and global markets, and get input, insights, and feedback from some of the smartest people we know. And we will no doubt come out of this event feeling more energized with a more clear picture of where the next trades are going to happen.

Looking forward to seeing those of you who will be attending in person. And for those of you who cannot make it out to Colorado this weekend, no doubt we will have slides, presentations, and interviews recorded and archived for you to review later on. Stay tuned!

~ @chicagosean

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