Stay Nimble - SPY, HUT, NKE

Covered Calls in a Crumbling Market

Setting the Table:

• Futures are crumbling this morning. Friday’s sell off wasn’t enough repricing, as the VIX has doubled in just three trading sessions. The Nasdaq is set to open down 5%, over 15% off its high less than a month ago. 

• Pricing inputs are and will hit local extremes today. Before the open traders are looking to adjust everything - but most importantly to stay nimble. Market sentiment is in control here, not fundamentals. 

• Friday’s session saw market widths explode into the close. SPY markets were nearly 1% wide in implied volatility terms - the lowest score we’ve seen in over 2 years.

• This is a good (and interesting!) week to talk about using IV figures for identifying overlay trades.

  •  The most important part of an overlay strategy is the underlying selection. Options are merely there to customize the outcomes, not direct them. 

  • When markets are “in turmoil”, it’s important to still remain focused on the underlying characteristics, not just spikey and jumpy volatility numbers.

  • However, higher implied volatility does create scenarios that offer attractive risk/reward for active traders

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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: NKE

•  There’s plenty of yikes when the NDX is down 4.5% premarket. Our Yikes issue today is NKE - a name you’ve seen splattered all over the Olympics these past weeks. They had a bad earnings report at the end of last month, and we’ll look at them in this market as being extra fragile. 

• The move on earnings blew out VRP figures which puts them up on this screen, but we can see that ATMVol30 figure has repriced significantly lower. Condors are only 1.2% of the stock price, and IV is currently only 27%. We see in premarket trading NKE is down 5.4% - more than your usual 27% IV name. 

• Setting up an overlay strategy here we should be concerned with one thing in two directions - Delta.

  • Selling a high delta call here will allow us to capture additional premium. I’d expect NKE IV to pop several points on the open, adding even more juice to these calls.  This 74 strike call will lose some premium as the market drops, but also gain in IV. Keeping the high delta trade short term gives you room to run.

  • Alternatively we can think about delta for a rebound. Lowering the delta should coincide with pushing out the term - you want room for that appreciation to happen.