Find Out How I Took Advantage of Today’s Volatility

Find Out How I Took Advantage of Today’s Volatility

Posted On October 2, 2020 2:26 pm

This week’s new feature, Friday “Review and Preview,” opened with a bombshell as late-night news broke reports that both President Trump and First Lady, Melania Trump, had contracted COVID-19. As expected, stocks opened deep in the red on Friday — snapping a two-day winning streak. 

Not to be deterred, Trump and his entourage promised to engage in a full day of official duties which included campaign events, pushing policy events and generally ignoring the conventional wisdom to quarantine despite exhibiting systems. This stands to form as results from Tuesday’s debate had little impact on changing minds as to who might be elected. From an economic standpoint, this news mainly clouds the political picture.

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Does this news crack some silver linings? Will it help push a stimulus package across the finish? Will it provide ammo to expand and extent more draconian actions regarding economic lockdowns? These questions are undoubtedly on the minds of many people. Nonetheless, the rhetoric heading into the election is sure to devolve even further.   On the financial front, stocks, especially, the tech-heavy “Nasdaq (QQQ)” led by “Microsoft (MSFT)” and “Amazon (AMZN),”  ending a four-week losing streak.  The QQQ’s have now undergone a garden-variety 10% correction, holding their support at the key 260 level. 

qqq invesco trust chart

From the Option360 portfolio perspective, the pullback was welcome —allowing me to roll several positions, namely “Applied Material Material (AMAT)” and “Activision (ATVI)” to reduce their cost basis by over 80% as we now head into the October 16 expiration with nearly little exposure or ostensibly ‘free trades’ which can deliver big profits. 

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One position, a bearish QQQ call spread, was causing some pain. If you refer to the chart above again, from two weeks earlier, you’ll see clear resistance around the $277-$280 level. The reason I established the QQQ bear call spread, which I sold Oct 10/09 277 put and bought the 280 put for a net credit of $110, was due to my belief that the rally would stall near the 277 level, allowing me to collect the premium by the Oct.10/09 expiration, rendering all options worthless. So, thanks to today’s (Friday’s) pullback, the position is back modestly in the green. Now, the position is one of patience, as time decay or theta, works in our favor.

Trump’s positive COVID-19 diagnosis will likely bring a cavalcade of political rhetoric next week, most of which I’ll ignore. But, that doesn’t mean it’ll all be meaningless as overreactions are often opportunistic.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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