Covered Calls: QS, GLD, SPY

Reviewing overwrites in the most liquid names

Setting the Table:

• Imagine a multiple choice question for the CFA, Series 65, or university options 101, that reads as such: 

  • Following an assassination attempt on a world leader running for reelection, how would you expect implied volatility markets to react?

    • Increase

    • Decrease

    • No change

• The VIX is in fact up so far on the day, so the knee jerk reaction here is still the correct one. But technically the Aug and Sep parts of the curve are down a nickel, and the October price (which will expire into the last VIX reading before the election) is off $0.15. Oh, and equity markets up up 50-75bps.

  

  Courtesy of vixcentral.com

  • This is a good quick explainer on election cycle and the VIX. 

• One of the things markets like is certainty. Certainty in outcomes allows for better capital formation and risk transfer. This is true for capital markets and businesses, but also financial markets. More investors, and more certainty for structural market participants means better liquidity. 

• The LIQ index measures exactly that for equities, and this week our lens for overlay opportunities is LIQ. Better liquidity means better strike selections, better execution prices, and better overall pricing in markets. 

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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: QS

• The LIQ score is a balance between volume and spread width. Top tier names (like you’ll see with the rest of these LIQ scores below) tend to be mostly about spreads. Something like QS, sees a surge because of its volume. 

• It would be highly unusual to see SPX volume surge 100%, but QS put up back to back days that were 10x and then 20x the prior average 30 days. For a slow summer week, that’s easily enough to top the charts.

  

• The battery maker signed a huge deal with Volkswagen, and everything got repriced. It’s hard to look at indicators in this paradigm compared to what they were historically, because the world just shifted.

• Where this liquidity profile goes is uncertain, but we’re likely to come back down to more reasonable volume unless the new cycle continues.