THE WEEK AHEAD: USO, EWZ, XLF; VIX/VIX DERIVATIVES
EARNINGS:
Earnings kick off in earnest this week with a bevy of financials (WFC, GS, JPM, C, BAC, MS).
Generally speaking, I haven't played these in the past due to low background implied, and nothing has changed in that regard this go-around from a premium selling standpoint: WFC (30/21), GS (27/24), JPM (20/21), C (16/23), BAC (0/22), MS (0/24).
That being said, it looks like the financial sector exchange-traded fund XLF (5/16) has put in a multi-year double-top, so I could see taking a bearish assumption directional shot on the notion that earnings in this sector may disappoint in a low interest rate environment. For example, the XLF February 21st 30/32 long put vertical costs 1.04/contract to put on, has a max loss metric of .96 and a break even of 30.96 versus a Friday close of 30.69, which are the kind of the risk one to make one/break even at/near where the underlying is currently trading metrics I like to see out of these.
EXCHANGE-TRADED FUNDS WITH THE FIRST EXPIRY IN WHICH THE AT-THE-MONEY SHORT STRADDLE PAYS >10% OF STOCK PRICE:
UNG (36/40), February
SLV (33/20), July
USO (32/32), April
EWZ (29/26), June
GLD (26/12), January '21
Pictured here is an EWZ 20-delta short strangle set up in the first expiry in which the at-the-money short straddle is paying greater than 10% of the stock price, 1.91 credit, delta/theta 0/1.41.
Although I would ordinarily go with the underlying paying in the shortest duration, we will start to run into seasonality issues with UNG in the February or March cycles (depending, of course, on Mother Nature), so would rather not hit that underlying non directionally here. And USO can be somewhat of a pain to trade due to its smallness.
BROAD MARKET WITH THE FIRST EXPIRY IN WHICH THE AT-THE-MONEY SHORT STRADDLE PAYS >10% OF STOCK PRICE:
EEM (66/16), September
EFA (20/11), December
SPY (14/12), November
QQQ (9/17), September
IWM (0/15), September
Well, we're in a volatility lull here, so this comes as no surprise that shorter duration isn't paying.
VIX/VIX DERIVATIVES:
VIX finished the week at 12.56, with the March, April, and May /VX contracts trading at 16.04, 16.56, and 16.80, respectively, so term structure trades remain viable in those months.
VXX and UVXY -- my go-to derivatives instruments -- both hit new 52 week lows last week, and VXX finished the week at 14.12, UVXY at 11.59. Although VIX has room to trundle lower from here, it probably wouldn't be a bad thing to pull off a few units in profit put on higher up the ladder and then wait for the next >25% pop in VIX (which would be a modest pop at 16 or so) to start legging back in.
Earnings kick off in earnest this week with a bevy of financials (WFC, GS, JPM, C, BAC, MS).
Generally speaking, I haven't played these in the past due to low background implied, and nothing has changed in that regard this go-around from a premium selling standpoint: WFC (30/21), GS (27/24), JPM (20/21), C (16/23), BAC (0/22), MS (0/24).
That being said, it looks like the financial sector exchange-traded fund XLF (5/16) has put in a multi-year double-top, so I could see taking a bearish assumption directional shot on the notion that earnings in this sector may disappoint in a low interest rate environment. For example, the XLF February 21st 30/32 long put vertical costs 1.04/contract to put on, has a max loss metric of .96 and a break even of 30.96 versus a Friday close of 30.69, which are the kind of the risk one to make one/break even at/near where the underlying is currently trading metrics I like to see out of these.
EXCHANGE-TRADED FUNDS WITH THE FIRST EXPIRY IN WHICH THE AT-THE-MONEY SHORT STRADDLE PAYS >10% OF STOCK PRICE:
UNG (36/40), February
SLV (33/20), July
USO (32/32), April
EWZ (29/26), June
GLD (26/12), January '21
Pictured here is an EWZ 20-delta short strangle set up in the first expiry in which the at-the-money short straddle is paying greater than 10% of the stock price, 1.91 credit, delta/theta 0/1.41.
Although I would ordinarily go with the underlying paying in the shortest duration, we will start to run into seasonality issues with UNG in the February or March cycles (depending, of course, on Mother Nature), so would rather not hit that underlying non directionally here. And USO can be somewhat of a pain to trade due to its smallness.
BROAD MARKET WITH THE FIRST EXPIRY IN WHICH THE AT-THE-MONEY SHORT STRADDLE PAYS >10% OF STOCK PRICE:
EEM (66/16), September
EFA (20/11), December
SPY (14/12), November
QQQ (9/17), September
IWM (0/15), September
Well, we're in a volatility lull here, so this comes as no surprise that shorter duration isn't paying.
VIX/VIX DERIVATIVES:
VIX finished the week at 12.56, with the March, April, and May /VX contracts trading at 16.04, 16.56, and 16.80, respectively, so term structure trades remain viable in those months.
VXX and UVXY -- my go-to derivatives instruments -- both hit new 52 week lows last week, and VXX finished the week at 14.12, UVXY at 11.59. Although VIX has room to trundle lower from here, it probably wouldn't be a bad thing to pull off a few units in profit put on higher up the ladder and then wait for the next >25% pop in VIX (which would be a modest pop at 16 or so) to start legging back in.