NaughtyPines

THE WEEK AHEAD: M EARNINGS; GDXJ, XOP, QQQ, IWM, VIX

NYSE:M   MACY'S INC
EARNINGS:

M (87/58) announces earnings this week and has the most appropriate rank/implied volatility metrics for a contraction play.

Pictured here is a narrow short strangle in the September monthly that is almost a short straddle, set up this way primarily because M is trading at 19.43, which Is smack dab in the middle of the short strikes. It's paying 2.25 at the mid-price with delta/theta metrics of -4.39/3.11. For those looking for more room to be wrong, the 17/22 short strangle is paying .89 which is a somewhat marginal play at 50 max (.45).

Given the fact that it has been somewhat hammered, I could also see taking a bullish assumption short put shot with the 22 delta 17 strike paying .52, the 31 delta 18 paying .83, and the 42 delta 19 strike paying 1.25. For those looking to potentially acquire, it pays an annualized dividend of 1.51 with a yield of 7.39% at current share price.

EXCHANGE-TRADED FUNDS:

SLV (98/26)
GDX (97/34)
GDXJ (94/40)
TLT (88/14)
GLD (87/16)
XOP (46/39)

Having worked through setups on all of these, only GDXJ and XOP appear to present worthwhile nondirectional premium selling opportunities in the September monthly with their respective at-the-money short straddles paying in excess of 10% of the value of the stock.

The GDXJ September 20th 42 short straddle is paying 4.68 versus 41.84 spot (11.2%) with the 37/49 short strangle camped out around the 16 delta paying 1.09.

Similarly, the XOP September 20th 22 short straddle is paying 2.29 versus 22.29 spot (10.3%) with the 22/23 short strangle straddling current price paying 1.81 should you want a more delta neutral setup with a smidge of room for intratrade adjustment without going inverted.

BROAD MARKET:

EEM (37/20)
IWM (33/22)
SPY (31/18)
QQQ (31/21)
EFA (17/15)

As with the exchange-traded funds, I'm looking for setups whose at-the-money short straddles pay more than 10% of the value of where the stock is currently trading.* Because background volatility in broad market is lower than in the exchange-traded funds which are, in turn, lower than that in single name as a general rule, you'll have to go farther out in time to get paid more than 10%.

Only QQQ and IWM meet the 10% test without going crazy far out in time (although I recognize that some might consider going out to February for a play is "crazy far out").

The QQQ January 17th 186 short straddle is paying 19.23 versus 186.49 spot (10.3%) with the January 17th short strangle set up around the 16 delta strikes -- the 160/207, paying 4.40.

Similarly, the IWM February 21st 151 short straddle is paying 16.02 versus 150.62 spot (10.6%) with the 16 delta February 21st 130/168 paying 3.86.

VIX/VIX DERIVATIVES:

For you "Vol Heads" ... .

VIX closed at 17.97 on Friday with the August /VX contract trading at 18.48, so the term structure is in contango from the front month to spot. M1-M2 is also in a smidge of contango, but M2-M5 are in backwardation, presenting a wonky S-shaped term structure. Look to potentially add VXX/UVXY bearish assumption setups on VIX pops back to >20 ... .


* -- Although you're certainly free to sell at-the-money straddles in these instruments, I'm using the short straddle value as more of a test to see whether the premium is sufficient to be "worth it." If it isn't worth It at-the-money, then out-of-the-money short strangles are probably aren't worth it, either.
Very good MA's and description buddy.
Reply
NaughtyPines Bullandbeartrading
@Bullandbeartrading, That being said, there is a vast difference between the way a short vol trader uses charts (they largely don't; they trade deltas, not price) and the way a price action trader would. For the vast majority of trades that are short vol-based, the chart is merely used to put a context around where the strikes lie in relation to price action. Short vol trade strikes aren't not chosen generally by looking at a chart, but rather at a given expiry's delta values. Consequently, a price action trader is likely to put in more time with their charts than a short vol trader would. I'm generally operating on the assumption that only short vol traders would be interested in the short vol trading ideas I post and so don't bother with marking up my charts in the "price action trader way." If people are looking to trade price action, then they should not be looking at my charts and/or short vol/vol contraction trades, since the two things are apples and oranges ... .
Reply
NaughtyPines NaughtyPines
@NaughtyPines, There is, in fact, but one arguable "price action" trade in this post, and that is the "Wheel of Fortune"/SPACk trade in M ... . The rest are short vol, delta neutral, nondirectionals.
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