Geopolitics - Sell The Rumor, Buy The News?

Relentless Selling

The old adage is buying the rumor and selling on the news; however, during this recent market correction, it's been the opposite. Selling the rumor and buying the news has prevailed when it comes to interest rate hikes and the geopolitical tensions between Russia and Ukraine. In both cases, the anticipation of rate hikes has sent the market into a downward tailspin despite the fact the Federal Reserve hasn't put forth any rate hikes. In addition, the anticipation of the Russian/Ukraine conflict boiling over into an invasion by Russia drove the markets further into correction territory.

As a result, the markets entered deep into correction territory. Over a third of the Nasdaq 100 stocks traded off at least 30% or more from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60% or more. In addition, massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

Per Tom Lee, many factors, including the market's big reversal at the onset of Russia's invasion of Ukraine, indicate the markets are now bottoming around these levels. Lee stated that the market's stunning comeback in stocks and a reversal in the Cboe Volatility Index signal that the pain in the market could be coming to an end. The market had a "buy the invasion" moment, Lee said in a note. The S&P 500 opened down more than 2.6% on the invasion news, and oil prices surged above $100 per barrel. However, markets typically sell off into the buildup of geopolitical escalations but rally on the day of the invasion. Continue reading "Geopolitics - Sell The Rumor, Buy The News?"

Dollar-Cost Averaging Into The Correction

Relentless Selling

The bears have been circling for months and have now mauled these markets into a correction. The linchpin was inflation along with an impending rising interest rate environment. The simmering geopolitical tensions between Russia and Ukraine only exacerbated this delicate market and pushed it into a full-blown correction. Over a third of the Nasdaq 100 stocks traded off at least 30% from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60%. Massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

However, during periods of market-wide corrections, investors can purchase heavily discounted stocks at a fraction of the prices these stocks were trading at just weeks prior. As history indicates, establishing positions during corrections can lead to outsized gains over the intermediate-term as the selling pressure abates and the macroeconomic backdrop resolves. Portfolio balance is key in all market environments and deploying cash during periods of heavily reduced valuations is essential. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies via patience and dollar-cost averaging.

Dollar-Cost Averaging

Repurposing Cash

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. Continue reading "Dollar-Cost Averaging Into The Correction"

Options Trading And Implied Volatility (IV) Rank

Recent Market Correction and Options

The post-pandemic gains have been negated as the accommodative monetary policies are coming to an end. The market has been smacked in the face with several macroeconomic issues via unsustainable inflation, impending interest rate hikes, and geopolitical issues. As such, a third of the Nasdaq 100 stocks are off at least 30% from their highs, half of the S&P 500 has fallen 15% or more, while the median biotech stock has sold off by 60%. Leveraging the Ark Innovation ETF (ARKK) as a proxy for the high-flying growth stocks, this composite is down 60% as well.

This multi-month period of sustained weakness has been accompanied by extreme volatility. With the increase in overall market volatility, implied volatility (IV) and IV Rank become advantageous for option traders as rich premiums can be collected when selling options. This type of extremely volatile environment that we've been faced with recently reinforces why risk-defined options (i.e., put spreads, call spreads, and iron condors) are critical if one chooses to leverage options as a component of an overall portfolio strategy. Risk-defined option trades establish your max losses and allow one to leverage a minimal amount of capital while maximizing returns.

Options and Implied Volatility

The goal of options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciate steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it's this implied volatility component, when used appropriately, that provides option traders with a statistical edge in trading over the long term (Figure 1). Continue reading "Options Trading And Implied Volatility (IV) Rank"

Post-Pandemic Gains Negated - Don't Be Remiss

Relentless Selling

For many individual stocks, the post-pandemic gains have not only been negated, but share prices are now lower than pre-pandemic highs. The accommodative monetary policies, Covid related stimulus, asset purchases, and market liquidity are coming to an end. Now, raging inflation, impending interest rate hikes, Federal Reserve tapering, omicron ebb and flow, continued supply chain disruptions, and geopolitical issues have culminated into the current market swoon. The latest market weakness has been persistent over the past few months while being exacerbated in January and February to start 2022. A third of the Nasdaq 100 stocks are off at least 30% from their highs; half of the S&P 500 has fallen 15% or more while the median biotech stock has sold off by 60%. Taking a look at a composite of high-flying growth stocks using the Ark Innovation ETF (ARKK) as a proxy, this cohort is down 60% as well.

The recent multi-month sell-off from November 2021 through mid-February was met with heavy and vicious selling. Valuations have been decimated overall, and cold water has been thrown on investor enthusiasm, especially in the more speculative stocks in cloud software, SPACs, and recent IPOs. The tremendous selling volume has inflicted damage across the board, with whole swaths of the market auto-correlating into a downward spiral. Now many opportunities are presenting themselves as valuations have been greatly reduced. Being too bearish may prove ill-advised over the long term as we're witnessing the 2020 Covid-induced sell-off unfold all over once again. Portfolio balance is key in any environment and deploying the cash portion of one's portfolio during periods of moderating valuations is exactly where this cash can be advantageous. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies during periods of indiscriminate and heavy selling. Continue reading "Post-Pandemic Gains Negated - Don't Be Remiss"

Downside Protection: Risk-Defined Put Spreads vs Cash Covered Puts

Option trading can provide a meaningful addition to one's overall portfolio strategy when used in a disciplined manner. When options are used as a component to a holistic portfolio approach, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is achievable. An options-based portfolio can provide durability and resiliency to drive portfolio results with substantially less risk via a combination of options, long equity, and cash. When engaging in options trading, specific rules must be followed. One of the most important rules is to structure every option trade in a risk-defined (put spreads, call spreads, iron condors, diagonal spreads, etc.) manner.

The January 2022 meltdown in the overall markets is a harsh reminder of the trade-offs between risk-defined options and options that have undefined risk. The overall markets were in freefall, with a large percentage of stocks getting cut in half with indiscriminate selling across all sectors. The extreme market conditions throughout January resulted in all stocks auto-correlating in a downward spiral. During these periods of unrelentless selling across the markets, risk-defined options are essential to protect one's portfolio from massive losses while preserving cash-on-hand within the portfolio.

Put Spreads vs Cash Covered Puts

Risk-defined option spreads (i.e., put spreads) prevent any losses beyond a specific strike price, avoids the assignment of shares, does not require a significant amount of capital, and does not soak up capital with share assignments. Conversely, in the case of cash-covered options (i.e., cash-covered puts), large amounts of capital are dedicated to the trade, and share Continue reading "Downside Protection: Risk-Defined Put Spreads vs Cash Covered Puts"