Inflation Cools (For Now), Stagnation Awaits

Posted on by Gary Tanashian

To maintain the inflation, a cooling of inflation was needed

That is one of those Alice in Wonderland-like statements, like the one I’ve got tattooed on my left forearm: “Contrary-wise, what is it wouldn’t be and what it wouldn’t be it would, you see?”

To maintain inflationary policy, as per various talking Fed (egg) heads, the hysterical run-up in inflationary expectations and fears had to be tamped down. And so, Google users have indeed eased their neuroses right along with a recent tamping of inflationary hysteria.

Inflation

While inflation expectations ease but remain on-trend. Continue reading "Inflation Cools (For Now), Stagnation Awaits" →

Delta And Theta: Probability And Time Decay

Posted on by The INO.com Team

Controlling portfolio volatility and reducing overall market risk while generating superior returns relative to the broader market can be achieved with options. Essential to this strategy is a blended options-based approach where 50% cash is held in conjunction with long index-based equities and an options component. Another critical element is setting the probability of success in your favor and leveraging time decay of options via Delta and Theta, respectively.

Acting with skill and caution over ~280 trades and ~13 months, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based/beta-controlled portfolio strategy. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. Options win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall option premium capture of 85% while outperforming the S&P 500. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk via a beta-controlled manner. The options-based approach circumvented September 2020, October 2020, and January 2021 sell-offs while outperforming/matching the S&P 500 over the 13-months (Figures 2-5).

Delta

Delta serves as a proxy for the probability of success at the expiration of the option contract. Thus, this value is an absolute number; thus, a negative (put side of the option chain) or positive (call side of the option chain) value is irrelevant. The interpretation of Delta is based on 1.0 less the Delta at a given strike. If the Delta is -0.14 on the put side, this translates into 1.0 - (-0.14) = 0.86; thus, a ~86% probability of the trade expires above the strike or is worthless at expiration. If the Delta is 0.20 on the call side, then this translates into 1.0 - 0.20 = 0.80, thus ~80% probability of the expiring below the strike or being worthless at expiration. Selling options near a specific Delta that is out-of-the-money places the statistical edge in your favor. Given enough trade occurrences, the probabilities will play out to reach their expected outcome. Thus, trading at a Delta of 0.15 will yield a winning trade success rate of ~85% if all trades go to expiration (Figure 1). Continue reading "Delta And Theta: Probability And Time Decay" →

The Fed's 'See No Inflation' Posture

Posted on by George Yacik

Pressure, inflationary pressure that is, is starting to grow on the Federal Reserve to start dialing back its mammoth asset purchases and zero percent interest rate policy. While its main position remains that the recent rise in inflation is only “transitory,” the Fed may have at last started laying the groundwork for an earlier move toward to a less accommodative policy rather than waiting until 2023.

That much became clearer in the release of the minutes of the Fed’s April monetary policy meeting last week.

“A number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. In other words, the Fed revealed that it is at least thinking that it may have to reduce its asset purchases—currently, $120 billion of Treasury securities and agency mortgage-backed securities each month—and possibly raise interest rates earlier than it thought because of the inflation threat brought on by a booming economy and government stimulus.

While it may be fair to cut the Fed some slack and let it be more patient in assessing the shape of the economy post-pandemic before it makes any fundamental policy changes, make no mistake that economic growth and inflation are revving hotter and show no sign of being as “transitory” as the Fed believes. Continue reading "The Fed's 'See No Inflation' Posture" →

Dollar, Gold, And Silver Update

Posted on by Aibek Burabayev

The U.S. dollar index (DXY) did not make a significant pullback despite my expectations posted earlier this month. The minor bounce was short-lived as the price quickly reversed all gains and updated the low after that.

Dollar, Gold, Silver Update: Daily US Dollar Chart

The downtrend is so strong that DXY could fit within a very narrow orange channel. However, I think we still need a visible correction to come, as new signals are alarming. Continue reading "Dollar, Gold, And Silver Update" →

Weekly Stock Market Forecast

Posted on by The INO.com Team

This week we have a stock market forecast for the week of 5/23/21 from our friend Bo Yoder of the Market Forecasting Academy. Be sure to leave a comment and let us know what you think!

The S&P 500 (SPY)

SPY Daily Chart - Stock Market Forecast

In last week’s forecast, I shared that I expected “a lower high to form and then a push back down to break below the recent lows near $405.” The S&P 500, (analyzed here using SPY) did indeed form a lower high and DID test the $405 level, but without the bearish sponsorship needed for a breakdown. Continue reading "Weekly Stock Market Forecast" →