CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
Bulls Trip On Higher Yields
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
CNBC has revised their Friday Option Action show which is aired weekly at 5:30. The show has been beefed up to the point that we think it is one of the best option oriented shows on the air. Check it out.
The bull market tripped over a spike in interest rates this week as a pickup in inflation threatened to slow the economic recovery. Despite dovish testimony before Congress from Fed Chair Jerome Powell that the Federal Reserve would leave rates lower for longer, yields on the 10 and 30-year T-Bills ticked above pre-pandemic levels. Powell stated that the Fed Committee wants inflation anchored at 2% and that employment was far below the Fed’s target, as the Committee felt inflation would only be a temporary distraction. The rise in rates saw the US Dollar reverse recent weakness, thereby upsetting international markets. The iShares Emerging Markets ETF (EEM) tumbled -7.5%. Stretched valuations in technology and retail were reined in as the Consumer Discretionary (XLY) and Technology (XLK) sectors led a broad based selloff on Thursday. Rate sensitive sectors Utilities (XLU) and Consumer Staples (XLP) also fell hard as yields moved higher. Energy (XLE) was the only sector that managed to close positive. Industrials (XLI) and Financials (XLF) outperformed on a rotation into cyclical, reopening and financial shares but still finished with small losses. Q4 earnings were mostly better than expected but company stocks that reported traded mixed after most had rallied into the reports. Bitcoin was also hit with volatility as the crypto currency touched a record high above $58,000 during the week and traded as low as $44,000. Economic data was better than expected with strong manufacturing numbers released, while the week’s jobs report showed a much bigger drop in Initial Jobless Claims than estimated. Back and forth trading during the week sent the DJIA, NYSE and DJ Transportation Index to record highs, but investors remained cautious going into the weekend as they kept an eye on rates and technical support levels for the different indexes. While the Dow snapped a three-week win streak, the S&P 500 and NASDAQ moved lower for a second straight week as a volatile February ended.
For the period, the DJIA lost 561.95 points (-1.8%) and closed at 30932.37. The S&P 500 fell 95.56 points (-2.4%) and settled at 3811.15. The NASDAQ tumbled 682.12 points (-4.9%) to close at 13192.34, while the small cap Russell 2000 dropped 65.64 points (-2.9%) finishing at 2201.05.
Market Outlook:The technical condition of the market deteriorated last week as the major averages struggled with rising rates. The technical indicators moved lower but were mixed. MACD, which gauges the short-term trend of the market, was negative for the different indexes but Momentum, as measured by the 14-day RSI was in neutral ground. Momentum for the DJ Transportation Index, however, remained bullish. Several of the different indexes tested support at their respective 50-day moving average (MA) during the week and, for the most part, managed to hold that much watched technical support level. The NASDAQ was the only index that finished the period below its 50-day MA, but was able to find buyers at the 13,000 area. On the plus side, a healthy bull market is usually led by gains in transportation and small cap stocks, and the DJ Transportation Index, which set several new highs this week, and the Russell 2000, never came close to testing support at their 50-day MA. Underlying breadth also deteriorated this week, with the NYSE and NASDAQ Advance/Decline lines losing ground, mainly on Thursday’s sell off, but didn’t show investors were in panic mode. New 52-week highs continue to show broad leadership in the market’s rally. Investor sentiment is still somewhat too bullish, but this week’s action should see sentiment move back into neutral ground.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Currently, the CTI is Positive at +12, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain in Bullish Territory into April.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Neutral at +0, down nine notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 2737 units while the number of new 52-week highs out did the new lows on four of the five sessions. Breadth was also mixed at the NASDAQ as the A/D line fell 5180 units while the number of new highs beat the new lows on four days. Finally, the percentage of stocks above their 50-day moving average fell to 64.6% vs. 74.3% the previous week, while those above their 200-day moving average eased to 85.7% vs. 89.4%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 2/24/21 shows inflows of $17.1 billion. Currently, the Sentiment Index is Negative at -3, up a notch from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 11/13/2020 (DJIA – 29479.81). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Ask Mr. Seifert
What is Pin Risk and how do I deal with it?
Answer: Pin Risk is the risk to a trader who is short an option where at expiration the underlying stock price is equal to or pinned to the short option’s strike price. When this happens, the trader will not know if he will be assigned on the short option leaving him with a long stock position if short a put option or a short stock position if he was short a call option.
When the weekly options expire each Friday, the profit or loss for the spread is calculated by subtracting the credit or debit from the difference between the strike prices used in the spread. Even using $1 strikes there is a 99% chance that the underlying closing price will not settle exactly on a strike price. If you are using $5 wide strikes there is a 1 in 500 chance it will settle on a strike, but from time to time it will happen.
Pin risk is the risk an option seller has that the option they sold would expire in the money just before market close, thus pinning them in the position until the market opens again. Once pinned, the outcomes can range from maximum profit to substantial loss during a period of time where the option seller has little or no control of their exposure.
In this event, the option converts into a long (if a call) or short (if a put) position on the underlying. Since the underlying will not trade until the market opens, the option seller is now exposed to the possibility that the underlying will gap unfavorably against them. Depending on how bad the gap is, it could create substantial losses for the option seller.
If you have either a debit or credit spread in place, it could settle on either the short end or the long end of the spread. The simple alternative if this happens is to simply close out the position before 4:00 on expiration day. If the options are liquid, the result should be close to what would have happened if the underlying stock settled away from the strike price.
‘Traders’ And ‘Investors’ Results
| ‘Traders’ Results | 21st Century Covered Call Results | ||||||
| Performance Since Week Ending 1/04/19 | Performance Since Week Ending 11/06/17 | ||||||
| S&P 500: | 01/04/19 | 2485.74 | S&P 500: | 11/06/17 | 2591.10 | ||
| S&P 500: | 02/26/21 | 3811.15 | S&P 500: | 02/26/21 | 3811.15 | ||
| S&P 500 Points Gain/Loss: | 1325.41 | S&P 500 Points Gain/Loss: | 1220.05 | ||||
| S&P 500 % Gain/Loss: | 53.3% | S&P 500 % Gain/Loss: | 47.1% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $9,881 | Optionomics Covered Call $ P/L: | $31,240 | ||||
| Optionomics Traders % P/L: | 65.9% | Optionomics Covered Call % P/L: | 31.2% | ||||
| Last Week’s Traders % P/L: | -6.3% | Last Week’s Covered Calls % P/L: | 0.0% | ||||
| Put-Call Hedge Results | The Billionaire Risk Reversal Results | ||||||
| Performance Since Week Ending 1/26/18 | Performance Since Week Ending 04/12/19 | ||||||
| S&P 500: | 01/26/18 | 2872.87 | S&P 500: | 04/12/19 | 2907.41 | ||
| S&P 500: | 02/26/21 | 3811.15 | S&P 500: | 02/26/21 | 3811.51 | ||
| S&P 500 Points Gain/Loss: | 938.28 | S&P 500 Points Gain/Loss: | 904.10 | ||||
| S&P 500 % Gain/Loss: | 32.7% | S&P 500 % Gain/Loss: | 31.1% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $38,248 | Optionomics Billionaire Trade $ P/L: | $249,314 | ||||
| Optionomics Put-Call Hedge % P/L: | 38.2% | Optionomics Billionaire Trade % P/L: | 498.6% | ||||
| Last Week’s Put-Call Hedge % P/L: | -0.8% | Last Week’s Billionaire Trade % P/L: | -35.2% | ||||
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