Setting the Table:
38.8M contracts the Monday of a big earnings and Fed week - that’s about what I expect for July 29th. Markets had a bit more of a path around flat than usual, but we remain poised at these macro index levels.
The straddles this week are a snoozer. While we know there’s a big news day on Wednesday, straddles aren’t showing the bump and plateau we’d expect if one event was really driving the pricing. That may be indicating that the market expects it to take longer to price in, or is a non-event.
Given the magnitude of the moves in the past week - is a $12 range in QQQ or $9 range in SPY enough to cover the potential movement?
LIQ did perk up in SPY despite lighter volumes. Spreads were a few clicks tighter- notably in the front months, as hedgers position for the upcoming news.
If you’re looking for a good listen about options markets and stories from some extreme opportunities - head no further than the latest episode of Flirting with Models with guest Kris Abdelmessih - “Life Through a Volatility Lens”
This week we’re analyzing opportunities through a dividend filter, and today it’s some quirks how that works with a hedged equity structure, as well as how to protect dividend stocks into earnings.
At Portfolio Design, we track opportunities through four different lenses: Volatility (VRP, IVNetHV), Liquidity (LIQ), Momentum/Mean Reversion (Bollinger) and Dividends. Each of these filters represents a different approach to investing, and can be used independently or in concert.
With these frameworks in place, follow along here twice a week as we dissect what the screens are telling us for Covered Call and Hedged Equity structures. Identify both short term trading and longer term investment opportunities. Free subscribers get a taste with “YIKES” and paid subscribers get analysis on the details of these opportunities, along with the full screener results.
Data comes from TheTape.Report where users can build their own screens and access a full suite of options indicators.
YIKES: BITO
Dividends are notoriously difficult to extrapolate. Even with high quality companies, the stream of future cash flows is unpredictable, and subject to continued success. Things get even more complicated with ETFs that hold underlying derivatives and are required to make mandatory distributions.
BITO does not have a 272.4% dividend (even if the options near term are giving some very wide marks.) It doesn’t even really have the 75% dividend yield that Nasdaq suggests.
What we have is an underlying underlying asset that has gone up a lot, and the ETF is making money on its futures positions - but those expire and create distributions.
Don’t expect these distributions to continue - unless Bitcoin keeps going up a lot. Investors aren’t seeing asset price appreciation, they just getting their money another way. When BTC was at 66k on May 15th, BITO traded $3.50 higher than the current price of $23.15 - and $3.20 in dividends have been paid. The difference is both trading and contango expenses.
This has some curious implications for the GULL setup - with several tranches of futures sitting on gains, there will be material distributions that continue to knock down the stock price- in addition to any directional risk.
Here we only have a 60 day setup for expirations (besides, that’s an eternity in crypto-space), but markets are up to .40 wide - be careful.
Further - the implied dividend out to Sep is $2.39. With a risk free rate of 5%, that adds $0.19 to a $23.40 stock for 60 days. But the 23 level synthetic stock is not trading for $0.59, its midpoint is a credit of $1.80. All of the sudden the forward price is closer to $21.60.
With that in mind, consider setting a GULL protection level significantly lower, as there is quite a bit of natural decay here due to this distribution mechanism.
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