A common theme discussed in this month's All Star Options conference call was the fact that many sectors, commodities, and stocks were in "messy" or "sloppy" sideways holding patterns right now. The selloff that began for stocks in early October and bled into early November seems to have abated somewhat for the time being, leaving many stocks with terrible looking charts offering no clues on direction.
But the price action has not been limited to just stocks -- bonds and commodities too all seem to be lost in the muck right now.
This might frustrate some, but these types of environments can be wonderful for delta neutral income strategies. And Gold $GLD is a perfect example of an instrument showing little commitment to any up or down directional movement.
Welcome back! Thanksgiving week is past us and now we can focus on finishing out 2018 strong.
We don't feel like the market is setting up for any type of major bounce or reversal here or any time soon. We also are cognizant of the fact that US stocks have fallen a good way since early October and the risk for further downside from here is very high. However, you may accuse me of being sentimental, but the optimist in me doesn't think we will see any further scary downside from here through the Christmas/NYE holidays. May we break correction lows? Yes. But I don't expect any major dislocations before 2019. Of course, I've been wrong before and I'll happily eat humble pie again if I'm wrong here.
Either way, whether markets have another slide or if we just coast into the new year, it feels to me the Utilities space is a good place to hang out and collect some premium.
There are still a lot of weak stocks out there that continue to show signs of worsening -- especially when they lag during every bounce attempt by the broader indexes. Goldman Sachs $GS is one of them. Goldman has been one of the stocks we've wanted to be short since mid October but the stock kept moving back in forth around our line in the sand -- $218 -- frustrating our attempts to pick a spot.
Last week, $GS finally made what feels like a decisive move to the downside and now is the time to strike.
Ok, I'm on an airplane on my way to San Francisco to present at a conference and to hang with our boy JC, so please forgive the liberties I took with the title of this trade plan. Clearly I'm showing my age...
But seriously, the materials sector is offering us some nice premium to put a fast income trade on into the holidays.
Honestly, I never thought a uranium play was something that would ever come across my desk, but a week ago JC published a piece highlighting the uranium space as displaying bullish turnaround characteristics -- which offers a nice portfolio diversification to many of us who are mostly positioning for the downside in equities right now.
As I've let this idea marinate in my head over the last week while watching declining volatility make long options more attractive, I've really warmed up to the risk/reward profile in this space and have identified a great way to position for exponential gains in the Global Uranium ETF $URA.
It's been quite a bounce in the markets since the end of October. And we expect to see many more such bounces in the days and weeks ahead as market participants battle to find equilibrium in a tape that has definitely been thrown off balance since early October's swoon. The thing is, our bet is that we'll see even more impressive bounces -- but from lower levels.
Our new regime thesis hasn't changed (yet), and as such, we view any bounces as great opportunities to establish new short positions in the weakest names in the market. And one of those weak names that we've been stalking is JP Morgan $JPM.
One of the beauties of options trading is even when we don't have the highest conviction in a trade, we can still participate by lowering or shifting our risks. I come from the school that says spread your bets out across the market -- small -- because the constant pursuit of edges will yield results over the long run as long as no bad individual trades are too big to take us out.
In our most recent monthly All Star Options Conference call, we highlighted a desire to play for a bounce in bonds. In the days since, the market gods are either taunting us, or smiling on us -- offering better entry levels.
It is not often that we fade stocks here at All Star Options. Mostly, we like to identify emerging trends or smart entry points in long established trends and hop along opportunistically for the ride. But given the market environment we're in, we believe it is only a matter of time before everyone gets touched. And we've identified a possible "home run" opportunity to get short a stock that -- gasp! -- printed new all time highs twice this week! It might truly be the last man standing.
It has been a wild couple of weeks for participants in US equities. Up is down. Black is White. Dogs sleeping with cats. This is what happens when market regimes go through change. The ripples can be seismic.
The one thing we can count on as options traders is that implied volatility -- more specifically, the fear premium being priced into options right now -- will eventually subside. If there is anything that can be counted on to be "mean-reverting" in this crazy world of ours -- it is most definitely implied volatility. This means we definitely want to be on the hunt for opportunities to put elevated options premiums to work for us. We want to be net sellers of options here.
With 53 days until December options expiration, now is the ideal time to start scanning the most liquid ETF options in our universe for income trades.
Disney is another stock that has been on our watch list for a short trade, but has stubbornly held on... until today. We had been waiting for $DIS to close below $113 and on Wednesday our criteria was finally met.
Could the broader markets be due for an oversold bounce here? Sure. But we think Disney's price action (better late than never) was an ugly omen for the start of a pretty bearish movie coming in this name over the next several weeks.