Nov 21, 2017 - A high correlation with the Nasdaq (QQQ) of nearly 0.91, but almost identical implied volatility means we
November 21, 2017 Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest.
Tom is Trading the NOB Spread. Besides working on his sweet dance moves this week, Tom is trading the yield curve — more specifically, he is long the NOB spread. This means he believes duration between the 10s and 20s is relatively flat, but may steepen in the future. The ratio he is trading makes for a delta neutral ratio: Long 5x the 10-year notes (/ZN) and short 2x the 20+ bond (/ZB). He is also long 9 of the 5-year note (/ZF) and short 2x the 30+ year bond (/UB). The plot at the bottom of the page helps to explain the logic. Historically, the yields at different durations have been considerably greater than it is now. Using the futures, he is betting on the spread widening back to historical averages. What Else is Tom Trading? Tom has short premium in a number of stocks — specifically Wal-Mart (WMT) and Microsoft (MSFT). Both of these positions has a “hint” of short delta in them, mainly because of the earnings run-up over the past couple of weeks.
As seen from this plot of yields, the difference between shorter and longer durations has historically been steeper than it currently is. Tom’s trade looks for the curve to revert back to historical averages.
Holiday Trading Schedule Trading has historically been light on holiday weeks — we expect this year to be no different. Be careful about liquidity. Holiday Calendar Equities/ Stocks
Thursday closed all day
Futures (Equities)
Thursday closing 12 pm CST, reopens 5 pm CST
Futures (FX, Interest Rates, Energy, Metals)
Thursday closing 12 pm CST, reopens 5 pm CST
Friday early close at 12 CST
Friday open until 12:15 pm CST
Friday open until 12:15 pm CST
We welcome comments/feedback. Best of luck in this week’s trading and have a happy Thanksgiving! Michael Rechenthin, PhD Kai Zeng
[email protected]
Nov 2013 Nov 2014 Nov 2015 Nov 2016
Nov 2017
Nov 2012
3-Month Correlation Matrix of Price Returns
What Do We Find Interesting in the Correlation Matrix? • Silver (SLV) and the Utilities etf (XLU) both continue to provide theoretical diversification to the overall S&P 500 (SPY) market. • The Oil Services etf (OIH) has been relatively flat over the past month — Implied volatility rank is relatively high at 40%. Correlation with the S&P 500 (SPY) is relatively week at +0.20. • We are continuing to keep our sizes relatively small in the metals — low correlations provides theoretical diversification, yet the low implied volatilities provide only a slim edge in our trading strategies. Silver (SLV) has a correlation of -0.13 and Gold (GLD) a correlation of -0.31 with the S&P 500. • Tech (XLK) is up nearly 5% over the past 1 month. A high correlation with the Nasdaq (QQQ) of nearly 0.91, but almost identical implied volatility means we don’t have much of an edge in trading this sector etf over QQQ. • Expect to see the relationship between the major market indices, S&P 500 (SPY), the small-cap Russell 2000 index (IWM), and the Nasdaq (QQQ), strengthen if we begin to have some selling in the market.
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
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Where We See Potential Opportunity. • The Regional Banking etf (KRE) continues to have a nice combination of higher than average IV Rank along with high implied volatility. Options can be a bit illiquid at times though. • Brazil (EWZ) has a nice combination of high implied volatility (e.g. nearly 3x as much premium as the S&P 500) and historically expensive options (i.e. high implied volatility rank) • Consumer Staples (XLP) and the China etf (FXI) both have IV Ranks above 40%. • Miners (XME) is down 6%, and although IV Rank may not be as high as we’d like, its options have a lot of premium due to high IV
DIA EEM EFA EWZ FEZ FXI GDX GDXJ GLD IWM KRE OIH QQQ SLV SPY TLT XBI XLB XLE XLF XLI XLK XLP XLU XME XOP XRT
Dow Emerging Index Fund MSCI EAFE Brazil Euro Stoxx 50 China Large Cap Gold Miners Junior Gold Miners Gold Russell 2000 ETF Regional Banking Oil Services Nasdaq 100 Silver S&P 500 20+ Year Treasury Bond ETF Biotech Materials Energy Select Sector Financial Industrial Tech Consumer Staples Utilities Metals and Mining Oil & Gas Explor. & Prod. Retail
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
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Upcoming Earnings
Symbol
Description
Expected Report Date Time of Day
Weekly In In S&P In Russell In tastytrade Options Dow? 500? 2000? Watchlist?
CRM
Salesforce.com Inc
Tue Nov-21
After Close
Yes
-
Yes
-
-
HPE
Hewlett Packard Enterprise
Tue Nov-21
After Close
Yes
-
Yes
-
-
HPQ
HP
Tue Nov-21
After Close
Yes
-
Yes
-
Yes
DE
Deere &
Wed Nov-22
Before Open
Yes
-
Yes
-
-
TIF
Tiffany & Co.
Wed Nov-29
Before Open
Yes
-
Yes
-
-
Historical Earnings Moves for Select Stocks It is often nice to examine historical moves in stocks around earnings. At the very least, it provides some context.
Historical Price Move From Immediately Before Earnings to that Friday's Expiration 2nd Q 2017
1st Q 2017
4th Q 2016
3rd Q 2016
2nd Q 2016
1st Q 2016
4th Q 2015
3rd Q 2015
2nd Q 2015
1st Q 2015
CRM
1%
-0%
1%
3%
-5%
4%
12%
5%
2%
7%
HPE
-7%
-7%
-7%
2%
-5%
12%
14%
5%
HPQ
2%
-3%
9%
-5%
-0%
8%
-2%
-14%
0%
3%
DE
-5%
7%
1%
13%
13%
-5%
-4%
4%
-8%
4%
TIF
-1%
-7%
3%
4%
7%
-2%
3%
4%
-2%
10%
* Largest historical increases were highlighted green; largest historical decreases were highlighted red.
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
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Stocks and ETFs with an upcoming dividend. In the money short call options are the only options at risk of additional early assignment due to the dividend. If the extrinsic value of the in the money short call is less than the dividend, the option is at (a greater than average) risk of being assigned.
Ex-Dividend Date
Dividend Per Share
In Dow?
In S&P 500?
3M
Wed, Nov 22
$1.18
Yes
Yes
-
-
LB
L Brands
Wed, Nov 22
$0.60
-
Yes
-
-
NVDA
NVIDIA
Wed, Nov 22
$0.15
-
Yes
-
-
JNJ
Johnson & Johnson
Mon, Nov 27
$0.84
Yes
Yes
-
-
HD
Home Depot
Wed, Nov 29
$0.89
Yes
Yes
-
Yes
UNP
Union Pacific
Wed, Nov 29
$0.67
-
Yes
-
-
STI
SunTrust Banks
Wed, Nov 29
$0.40
-
Yes
-
-
ENR
Energizer Holdings
Wed, Nov 29
$0.29
-
-
-
-
CA
CA
Wed, Nov 29
$0.26
-
Yes
-
-
YUMC
Yum China Holdings
Wed, Nov 29
$0.10
-
-
-
-
PSEC
Prospect Capital
Wed, Nov 29
$0.06
-
-
-
-
CSX
CSX
Wed, Nov 29
$0.20
-
Yes
-
Yes
ABX
Barrick Gold
Wed, Nov 29
$0.03
-
-
-
-
GS
Goldman Sachs Group
Wed, Nov 29
$0.75
Yes
Yes
-
Yes
Symbol
Description
MMM
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
In Russell In tastytrade 2000? Watchlist?
Page 5 of 10
Some of the Highest Viewed Shows Include: Date
Segment
Title
Link
Fri, Nov 17
Market Measures
Currencies and Equities
LINK
Fri, Nov 17
Resize & Analyze
Week of November 13th
LINK
Fri, Nov 17
tasty Extras
Goldman's Top Trades for 2018
LINK
Fri, Nov 17
Closing the Gap - Futures Edition
Is the Yield Curve a Red Flag?
LINK
Thu, Nov 16
Market Measures
Managing Winners and Volatility
LINK
Thu, Nov 16
Options Jive
Does Theta Have Character?
LINK
Thu, Nov 16
Trades From the Research Team LIVE
Trades From the Research Team LIVE
LINK
Wed, Nov 15
Market Measures
Optimal Debit Spread Mechanics
LINK
Wed, Nov 15
Scalping
Scalping 2017: Part 1
LINK
Wed, Nov 15
tasty Extras
Sosnoff Says | Cryptocurrencies
LINK
Wed, Nov 15
tasty BITES
Trading Sector ETFs
LINK
Tue, Nov 14
Market Measures
Depressed Market Moves
LINK
Tue, Nov 14
Options Jive
How High IV Rank Helps
LINK
Tue, Nov 14
Strategies for IRA
Making Options Efficient in an IRA
LINK
Mon, Nov 13
Market Measures
Defending Against Large Moves in Options LINK
Mon, Nov 13
Options Jive
SKEW Impact on Position Management
LINK
Mon, Nov 13
Best Practices
Utilizing Bob the Trader
LINK
Fri, Nov 10
Market Measures
The Bitcoin Market
LINK
Fri, Nov 10
Resize & Analyze
Week of November 6th
LINK
Fri, Nov 10
Closing the Gap - Futures Edition
Large Cap vs. Small - Time for a Turn?
LINK
Thu, Nov 09
Market Measures
Delta and Rolling Volatility
LINK
Thu, Nov 09
Options Jive
Calculating Portfolio Leverage
LINK
Thu, Nov 09
Trades From the Research Team LIVE
Trades From the Research Team LIVE
LINK
Wed, Nov 08
tasty Extras
Trade the Headlines: DIS
LINK
Wed, Nov 08
Market Measures
Characteristics & Ideas for Low IV
LINK
Wed, Nov 08
Options Jive
How USO Works
LINK
Wed, Nov 08
tasty Extras
Thoughts on Wealth Creation & Retirement
LINK
Tue, Nov 07
Market Measures
Crude Oil, Oil Stocks & the S&P 500
LINK
Tue, Nov 07
Options Jive
Sizing Trades Efficiently
LINK
Tue, Nov 07
tasty BITES
How Market Moves Affect Buying Power
LINK
Mon, Nov 06
Market Measures
Optimal Risk: Reward in Strangles?
LINK
Mon, Nov 06
Options Jive
Diversifying an Options Portfolio
LINK
Mon, Nov 06
Best Practices
Delta & Direction
LINK
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
Page 6 of 10
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
Page 7 of 10
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
Page 8 of 10
© tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
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Reading this Report Expected Range Cone. The following pages show stocks and ETFs that the tastytrade Research Team currently find have relatively high or low volatility. The colored cone represents a 30-day expected theoretical price range that is calculated from the options’ implied volatilities. If the implied volatility is relatively high, then the market is expecting a larger price change in the underlying stock or ETF. From this we can derive the market’s 1 standard deviation theoretical expectation of where prices might be in the future. In other words, the market is expecting, with a 68% theoretical probability, that prices will fall within the boundary of the cone at the end of 30 days. Cone Color. The color of the cone is significant. The darker the color, the more “extreme” the implied volatility (IV) which is represented by implied volatility rank (IV Rank). This information can help you decide on a trading strategy.
Glossary IV. Implied Volatility is the estimated volatility of a security’s price derived from its option price; the higher the IV, the more expensive the option and therefore the larger the expected price move. IV is an annualized number of volatility, e.g. a IV of 27 means the option’s market is pricing in an annualized price range, either plus or minus, of 27%. IV Rank. IV by itself doesn’t tell us if if the volatility is high or low - but IV Rank does. An IV Rank of 70 means that the IV is 70% between its low and high IV over the past year. The higher the IV Rank, the higher the security’s IV is compared to its past year. We provide six levels to make evaluating easier: • Extremely High: IV Rank between 90 and 100 • High: IV Rank between 75 and 90 • Moderately High: IV Rank between 50 and 75 • Moderately Low: IV Rank between 25 and 50 • Low: IV Rank between 10 and 25 • Extremely Low: IV Rank between 0 and 10 Option Liquidity. At tastytrade we have our own theoretical measure of option liquidity, Poor, Moderate, Good, or Great. It examines the options’ bid/ ask spread, open interest, and the number of strikes with non-zero bids. Correlation with S&P 500. Correlation is a statistical measure of how strong a relationship two securities have with one another. A correlation of -1 means the stocks are perfectly negatively correlated (they move in opposite directions), while a correlation of +1 means the stocks are perfectly positively correlated (they move in the same direction). A correlation of 0 means there exist little relationship. Earnings. The earnings date of the security. In practice we tend to see stocks have a larger amount of implied volatility (IV) nearer to earnings as the market is pricing in the fear of the upcoming earnings announcement. In parenthesis, is BTO or AMC; "Before the Open" or "After Market Closes", respectively. Upcoming earnings dates do sometimes change.
Disclosures Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf tastytrade content is provided solely by tastytrade, Inc. and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Please read Characteristics and Risks of Standardized Options before deciding to invest in options. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). All customer futures accounts' positions and cash balances are segregated by Apex Clearing Corporation. Futures and futures options trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products found in Disclosures under the Documents tab. © tastytrade.com, 2017
Michael Rechenthin, PhD | Kai Zeng
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