Growth & Balance

Yo Pit Crazies

 

Since I made the transition to retail trading a number of years ago, I have heard the term “income trade” like it is some gift to sell a spread and get the money.

 

During 15 years of floor trading, I never heard that since no one came in and priced the “income trade.”

 

Maybe because I was buying all that juice.

 

As a floor trader, I learned a trick about selling premium — and I can teach it to you.

 

I can teach it to you … but one must have an open mind.

 

The trick is this: Use positive theta trades to finance buying options.

 

Now, you may be asking, “What the heck do you mean, Andrew?”

 

Well, theta is just the value an option decays with all other model inputs being equal. If an option is sold, the option seller expects to collect a theoretical amount of decay every day.  

 

That is money in the bank only after the option position is closed.

 

Don’t forget the closed part.

 

Every risk graph created to model theta hides the secret that, under normal conditions, only about 50% of available decay is accessible until late in the cycle. 

 

And I mean with 3-days-to-go late.

 

These are rough guidelines, but:

 

      • Door No. 1: 50% of the decay will happen from entry to 5 days to go to expiration
      • Door No. 2: 50% or the balance of decay will take from 5 days to expiration to until 4 p.m. EST on expiration day

This leaves the option seller with some questions …

 

What is the purpose of the option sale? Do you hit the beginning of the cycle or the last, high-octane, fast decay part of the cycle?

 

In the case of the Power Moves Portfolio  (see below), I want to use a positive theta to buy other options. That is my position goal, so I use the earlier part of the cycle. 

 

I want to achieve “theta balance.” That means I have long theta (positive decay) where I have edge and use the projected proceeds to buy options.

 

There are a lot of ways to manage a position but this works best with multiple overnight  positions in several names …

 

That sounds like the Power Moves Portfolio. And so far it is working pretty well. I’m up $1,500 on a $15K account I have allocated, so 10%. That’s the good news.

 

Also, I am now just long some calls and puts in General Electric (Ticker: GE), Ford (Ticker: F), Global X CyberSecurity ETF (Ticker: BUG), Palantir (Ticker: PLTR), Taiwan Semiconductor (Ticker: TSM) and Cleveland-Cliffs (Ticker: CLF) 

 

Now I need to hunt for some positive theta. I own all those calls and puts with July and Sept. duration mostly via house money (using account gains to trade other securities), but a stall in the market would mean my gains go bye-bye for a while.

 

Frank Gregory just provided a new list of Power Movers, but the volatility is cheap in all of them.  

 

To be honest, implied volatility is at the low of the year, so a credit spread will take a while to pay, per my lesson above.  So maybe a combination of credit spread and long strangle somewhere is the answer.

 

Frank’s new ticker list is:

 

      • Enbridge Inc. (Ticker: ENB) pays $3 in dividends a year, so a tough option trade but a risk reversal might work
      • BP (Ticker: BP)  A put credit spread in the July cycle for a 3% yield is not terrible.
      • BWX Technologies (Ticker: BWXT) is too thin for an options trade for now, but it’s a good story. And Frank has a knack for a story
      • All the FAANG stocks are under the Tax Man’s hatchet. As funny as this sounds, just a straight strangle purchase in Invesco QQQ Trust Series 1 (Ticker: QQQ) sounds pretty good, since the IV is so low.

I’m leaning towards a short put spread in BP and buying a one-lot strangle in QQQ.

 

Finally, our track record in the portfolio so far:

 

 

To Your Trading Success,

 

AG

Headed For A Double-Top? Maybe Not…

The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.


Hey Traders,


Last week we saw the S&P 500 (Ticker: SPX) make a run at new all time highs, just barely missing a new all time high close by about two points…


The last time that happened, the market took a dive …


Are we heading for the same outcome?

Is this a double top?


Big money has an opinion …


Here is what the smart money thinks …


With the SPX closing just two points away from an all-time high, I’m sure there are a lot of traders out there wary of the market hitting a double top.


But …


That’s not the way Smart Money (aka institutional money) is trading.


On Friday, as the S&P 500 was approaching an all time high we saw a really busy day in the VIX, trading over 700,000 contracts.


What was crazy is that it was on a 1-to-1.6 ratio of calls to puts.


That means for every 10 calls that traded, 16 puts went up.


And these trades were not small in size.


The eight biggest trades that went up in VIX on Friday were all puts … and all July dated!


Here are the top four …



On the day, there were over 90,000 17-strike puts traded.


BIg volume went up across the board in July-dated puts…



What does this mean?


I think the smart money is playing for the VIX to fall below 15 by the 4th of July; a thesis I have held for the last two months.


The general trend in VIX continues to be down as volatility subsides.


I would be a buyer of the July 15-strike puts, and maybe even the July 14-strike puts for $0.05 ($0.05 is a pretty inexpensive play on dropping volatility).


Because the VIX looks like it is set up to take a fall …


Your Only Option,


Mark Sebastian

These Travel Stocks Could Be Taking A Trip Higher

Hey Traders,

Like I talked about last week, travel stocks are looking like they may be one of the last remaining places to pick up some “reopening” upside.

As things start to go back to “normal,” people are ready to get the heck out of the house, and start moving around freely again.

Last week I talked about two airline stocks I’m looking at as things potential post-pandemic plays …

One of which was American Airlines (Ticker: AAL) …

And wouldn’t you know it … I closed out a trade on AAL in my Robinhood Trader program this week for a 56% win! 

AAL recently echoed fellow airline Delta’s (Ticker: DAL) promising booking status, stating that current booking demand is already at 90% of 2019, and the airline expects to exceed 2019 bookings as demand rises into the summer. 

Of course, AAL and DAL are hardly the only tickers getting ready to take a trip to the upside …

Let’s look from the skies to the sea … where cruise lines are starting to get their groove back.

Norwegian Cruise Line Holdings (Ticker: NCLH) is continuing to creep higher, but the shares are still sitting at just $32 … well below the $58-$59 mark it was cruising at before the pandemic sank its ship, so to speak …

Chart courtesy StockCharts

So we’re seeing some recovery, with plenty of upside potential …

And in the option pits, NCLH’s options are relatively cheap right now, with the stock touching a 52-week low at-the-money 30-day implied volatility (ATM IV) on Friday. 

Near-term at-the-money calls are trading for less than $1.30, but given that NCLH won’t start sailing from U.S. ports again until August, I’d like to look a little further out than that …

Could successful late summer and fall cruise bookings push NCLH back up near its former highs by the new year?

What about by January 2023, where at-the-money calls are selling for $9.25? The shares would have to climb above $41.75 to be profitable, but that’s still well below their pre-pandemic highs …

It’s a similar story with United Airlines (Ticker: UAL).

Like I mentioned above, DAL and AAL expect domestic travel this summer to exceed 2019 levels, in spite of recent rocky second-quarter forecasts. With the uptick in travel, I’m expecting airlines will eventually continue their upward trajectories … including UAL.

 Stock courtesy StockCharts

UAL shares have seen a significant recovery since the COVID crash, but they’re still flying well below their pre-pandemic levels. 

What’s more, not only is UAL off its 2019 highs, it’s still slightly off its 2021 highs, in spite of already reporting its domestic bookings have exceeded 2019.

Like NCLH, options are relatively cheap right now, with IV sitting at a 52-week low …

If UAL could even just reclaim its 2021 high by the upcoming July expiration (which could be questionable given the recent sideways action of the shares, but there’s still over a month for this to play out), there’s some call options to be found that could pay out quite well.

And of course, checking back in with DAL, I still see some potential upside there as well, though the shares don’t have quite as much room to run before hitting their pre-pandemic prices.

Although DAL (and AAL) recently hit some turbulence after shaky second-quarter guidance, they’re both continuing to forecast rising demand throughout the rest of the summer — and, presumably, beyond, which bodes well for continued recovery in the long-term.

Chart courtesy StockCharts

DAL also seems to have stalled out over the last several weeks, but that, coupled with year-low IV, may benefit options buyers with relatively cheap prices.

As reopening continues, these pockets of value will be harder and harder to come by, but for now I will continue watching travel stocks for potential bullish plays.

Your Only Option,

Mark Sebastian

Raging Bull (Flag)

Hi Shoppers,


Let’s roll right into it on a Monday!


Rocket Companies (Ticker: RKT) is bull flagging:


A bull flag occurs after a runup, the stock takes a breather and is gathering strength to make the next push higher.


I think RKT can trade back to the $22-$23 area.


I like buying the June 18 19.50-strike calls, which are so slightly in the money, with a 75.33 implied volatility.



There is a huge call skew in RKT, with the out-of-the-money calls trading at much higher implied volatilities.


I will take advantage of that and lower the cost of my trade entry by selling the 29.89-strike calls with an implied vol of 160.51.


All these out-of-the-money calls are so bid up and they are trading. This is due to the fact RKT is hard to borrow and is a meme stock candidate.



I will buy the June 18 19.50-/29.89-strike call spread and pay up to $1.


That is a 10.39-point spread for $1. With the long call $.27 in the money expiring in two weeks, it equals a nice risk/reward trade.


I will begin to take profits $2 and higher and take my losses if the spread trades down to $.70.


Thanks for Reading … See You Next Tuesday!

Licia Leslie

Archegos Failure Is a Preview of What’s to Come

Hey There Income Hunters,

 

Here’s your first big thought for the week …

 

We need to use the Archegos failure — remember that? — as a warning of what’s to come.

 

Why?

 

Because today I’ll reveal a developing crisis in the gold derivatives markets that may only be months, or even weeks, away from triggering seismic disruptions worldwide.

The coming crisis may well result in a revaluation of gold prices to MUCH higher levels as we continue the transition to a new global monetary system … 

And it will also be a signpost that bank counterparty risk is rising — which may be the catalyst for bursting the financial asset bubble.

(Check out my video Archegos Failure and the Role of Derivatives to gain an understanding of the part derivatives play in the overall risk embedded in bank operations.)

The chart below illustrates a total of almost $600 trillion nominal size or face value of over-the-counter (OTC) derivative transactions outstanding.

OTC global derivatives present tremendous systemic counterparty default risk due to its lack of transparency, oversight and regulation. It will continue to be a critical signpost to monitor for counterparty failures and potential contagion that could trigger a daisy chain of misfirings leading to a global banking crisis.

Today, I will take you through the gold derivatives market crisis that began in 2019 and accelerated during COVID-19. It led to a change in bank rules that may cause banks to shut down their gold derivatives operations and allow physical gold to trade at it’s true price — and much higher — price

The Bank’s Role Under Question

Systemic risk has always been the major concern in capital markets. Today, it’s concentrated among a handful of global banks that are deemed too big to fail, so this risk goes ignored.

COVID-19 has proven to the Fed that the Banks' role as intermediary may be interfering with their goal of transferring wealth from the wealthy to the lower and middle class. Meanwhile, COVID has become a scapegoat for many market players who share an attitude that once the pandemic is over everything will return to normal.

I have never been in the “return-to-normal” camp because of what I have been talking about for months and that is this …

The US is at the end of its long-term debt cycle and in all of history the end of a long-term debt cycle was anything but normal.

The Gold Derivatives Markets

BLBelow is an overview of the London Bullion Market Association (LBMA) forward contract market and Commodity Exchange (COMEX) gold futures market.

      • Gold derivatives markets are controlled by bank bullion derivatives desks. These desks are basically trading desks required to trade for profit.
      • The LBMA members consist of 12 market makers, all from the top banks, and 31 other banks, which may or may not take positions. All bank desks are funded by the expansion of bank credit.
      •  According to the Commodities Futures Trading Commission (CFTC) there are 28 swap dealers who are active in gold futures on COMEX.

Systemic Risk in Gold Derivatives

Similar to the way bank prime brokerage operations facilitated Archegos’s financing of equity trades, LBMA member banks extend forward swap agreements, which are simply unregulated futures contracts on the price of gold, to customers desiring exposure to physical gold…

The banks open “unallocated gold” accounts for the customers, allowing the bank to maximize profits by never actually putting physical gold in the account.

The banks instead let customers believe they have access to physical bullion … when the accounts are actually backed by forward swap contracts to maximize the bank's leverage while helping them to avoid using capital to finance the gold bullion.

This process is identical to the prime brokers' use of equity swaps with Archegos.

At the top-end, gold dealer banks executed gold swaps with clients in an amount equal to $114 billion a day at today’s gold price…

The LBMA market makers would state that their short positions in the gold derivatives was backed by sufficient bullion held in the vaults so as not to alarm the markets. However, as you’ll see below, that was not the case

Meanwhile, running long positions for forward settlement at the banks in London led to larger and larger dangerously leveraged operations with as much as 50% still on today…

Banks Busted

Corruption among traders peaked in August 2019 when a JP Morgan trader pleaded guilty to manipulating the precious metals market for nine years. In the past 12 years, cases against traders for rigging settlement prices of gold futures and swaps have been brought against 16 defendants with most pleading guilty.

All along, banks continued the process of pumping up COMEX gold futures then dumping long contracts on their clients, prior to selling futures to push prices down and force the closeout of customers’ positions, allowing banks to profit on their trades …

However, toward the end of 2019 as gold broke out, customers had the upper hand on the banks. Interest rates were softening after the repo spike to 10%, driving gold futures higher:

The customers — considered suckers by the banks — were finally breaking the banks, who held most of the shorts.

Gold Trading Desks Crushed

Once COVID hit, businesses turned to banks for massive liquidity. That shifted the banks’ focus from making profits to fearing losses.

The scenario is common for banks when a negative shock hits the economy. They are forced to take every opportunity to reduce their balance sheet and free up space to make emergency loans to customers.

So, the gold trading desks were told to unwind their positions at the worst possible time. These massive short positions were a result of never buying physical gold bullion against the constant customer buying of gold….

The forced closing out of positions caused the collapse of the all-time-high in open interest (see below) …

This has all caused a panic for LBMA and COMEX since throughout the industry there are still many short positions held by bank trading desks.

Bank of International Settlements (BIS) Forced to Pull the Plug

After years of talk about how corrupt the paper precious metals market is, the BIS has been forced to shut it down.

The BIS is the “central bank of central banks,” responsible for working on behalf of all central banks to ensure the stability of the global monetary system.

So, with the U.S. dollar as the reserve currency, maintaining a strong dollar via suppression of gold was a main priority for BIS …

Until now.

BIS’s main role now shifts to facilitating the smooth transition to a new monetary system — based on a basket of currencies backed by gold.

In meeting its current goals, leaders want to eliminate the gold derivatives market so gold can be used by all central banks in a way that strengthens the new global monetary system.

This ensures further volatility in the currency and financial markets as posturing from China, the U.S., Canada, the U.K., Japan and Europe all have a say in the overall makeup of this new monetary system.

Much more to come on this …

Bring It Home

Today I wanted to give you the background that led to the BIS rule changes that will impact the precious metals market in a HUGE way.

There is much more inside intel for me to reveal on what is happening behind the scenes and its impact on precious metals and all related markets.

Please join me this Thursday at noon EST when I share information that is critical to trading in the weeks ahead. I’ll also reveal three new trades that capitalize on the major changes coming …

Don’t miss it!

Live and Trade With Passion My Friends,

Griff