Covered Calls: IWM, HUT, BRK_B

Tightening the delta on high momentum opportunities

Setting the Table:

• Despite political turmoil for the second weekend in a row, futures are ready to get back to their regularly scheduled programming. We look slightly higher coming into expiration Monday, despite losing - gasp - over 2.5% last week. 

• It was a lighter week for liquidity, despite there being strong volumes. Perhaps there’s slightly more uncertainty in the market with earnings coming up next week, and a bit of price teetering.

  

• Volatility still sits close to secular lows. As we discussed the past week, this rate and volatility environment makes for interesting structured product opportunities. Cheap(er) options can also be used given the overall market level to make defensive or momentum plays. 

  • One of the most difficult things about market tops is that an all time high is also usually preceded by an all time high. This makes covered calls and hedged equity trades particularly interesting for names that are hitting price extremes. 

  • Our lens this week is price action. Objects in motion tend to stay in motion, so we’ll use the Bollinger Bands to find candidates this week. 

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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.

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Yikes: IWM

• It’s not often we say “yikes” about index moves, but the action in the Russel 2000 certainly has our attention. While I don’t necessarily abide by technical analysis, this jump through the 2 standard deviation Bollinger band is not something we see regularly in index products.

  

• We can see with the IVNetHV figure that implied volatility is tracking slightly higher than historicals - because anyone short vol the last month probably had a rough time. 

• That is driving up the cost of Covered Calls, but puts are actually going up more. (Something we’ve seen in other indices also.)

  

• When selecting strikes in a name where we’ve seen significant action, consider bringing them in tighter to capture more of the ATM vol increase. Bumping the trade up to 40 delta rather than 30 delta gives you almost twice the premium (but puts you closer to the heat.)