ITM IN Signal - Please Read
Well, it was yesterday!
On Saturday I wrote:
We’re looking at a bull, baby as it may be. We wanted a bull – and now we have it, But why, oh why, I ask, does the market always wait until I am on holiday before deciding to start a bull or a bear?
The some rather nasty news that may change things: the U.S. lost its AAA credit rating from Moody’s. Let me explain.
Who makes credit ratings?
There are 3 major credit rating agencies, and here are their current ratings:
- Moody’s: Aa1 (downgraded from AAA this weekend)
- Fitch AA+ (downgraded from AAA in August 2023)
- Standard & Poor’s: AA+ (downgraded from AAA in August 2011)
The downgrades are about concerns over debt and deficits, neither of which are news; we’ve been living with them since the GFC, and covid exacerbated it.
Why do credit ratings matter?
The downgrade will have an effect on the market. It means that the U.S. may have higher borrowing costs, which will ripple through the economy. Stocks generally fall when interest rates go up, hence all the focus on whether or not the Fed will cut rates. My tip? Expect gold to go up – but I am not suggesting that you buy it, only an observation. Here it is graphed against SPY for the last year.
But I digress. There’s another problem with the downgrade:
Automatic Rebalancing
Some institutional investors (pension funds, insurers) have mandates to hold only top-rated debt. A downgrade can trigger forced selling, affecting both the bond and stock markets simultaneously. So, not good news.
So what now?
I am going to leave the rest of the blog as it was originally written 2 days ago, but with the added proviso: look at the section below on the futures before you act.
Trials and Tribulations
I have had the most frustrating week. I am in Provence (which is lovely) but seems determined to make my life hard. I mentioned last week that my phone (and hence hotspot) stopped working Friday 9th, but I managed to get it back Monday 12th in time to put up the Blog.
Then a storm on Monday night knocked out the hotel internet and 6 days later it is still not up I am relying on my hotspot – but then it started behaving weirdly, with an unknown device connecting to it and chewing up 2GB in a matter of minutes.
Catch 22
To buy more GB you have to have an Internet connection – right! It is the middle of the night in Australia, so no-one answers the phone.
To top it all off, I dropped and killed my mouse, had to go looking for a new one, and on the way someone in an enormous 4WD ran into the back of my hire car – of course, it (the hire car) was a Lexus, bien sur.
I think the universe is trying to tell me something! The life of a dilletante is not easy. But I’ll stop grizzling now and get on with things.
To the markets
We have a lot of signals this week – and the next questions will be:
- When exactly should I get in?
- What should I buy?
First, let’s check the charts.
SPY Charts
SPY has had a lovely week – 5 increases in a row, and the golden cross has formed – but not yet confirmed. We have to wait until we see real white space between the SMAs before we take action. But – another good day should do it. We’ll have to watch the close on Monday and be prepared to buy on Tuesday.
The volume has been slightly above average which is a good sign.
On the long-term chart, we see that we are approaching the 600 level, but not yet reaching the previous uptrend.
SPYG Charts
SPYG has clearly had a confirmed golden cross, hence the special email I sent out earlier this week.
On the long-term chart, we can see that it has recovered from its swoon, and is bumping right up against the uptrend (which may prove resistance – or may not!)
QQQ Charts
If you are trading QQQ (it’s not actually in the books, but I always cover it anyway) you can see that a golden cross in in place and confirmed. That’s our buy signal.
On the weekly chart we see that it is resting right on our trend line (red dashes) and this may prove to be resistance. May. I notice people are saying that we’ve had a good run and are due for a pull back, but I’ll talk about that in The Week Ahead.
VIX Charts (Volatility)
To top off all the nice charts, we see that the VIX is back in low-volatility territory.
ITMeter
OK, jumping the gun a little here for SPY – but assuming that Monday closes up then this will be correct.
The week ahead
So let’s go back to the questions we asked earlier:
When exactly should I get in?
Several people have pointed out that this has been quite an uptick, and shouldn’t we maybe wait until there’s a pullback?
This sounds sensible, other than we don’t know WHEN and IF the pullback will happen and at what level. The backtesting was based on entering the day after the golden cross was confirmed – no ifs, no buts. An absolute rule, even though in hindsight we could perhaps point to a better entry. But that uses hindsight, and we are needing foresight here.
I have found, personally, that waiting for a pullback never seems to work for me – the market keeps going higher and I am playing catch up. There’s a special sort of pain watching the market go up without you. However, if you wish to wait a few days probably in the scheme of things it will not make an enormous difference to your outcome. Bull markets move slower and last longer than bear markets.
What should I buy?
Let’s look at SPY, SPYG and QQQ separately.
Buying SPY Options
SPY is currently trading at $594, so if you are going for the 50% strike then 300 would be a good choice. If you are going for a 60% strike then $350 or $355 would be about right. The best expiry dates would be December 25 or January 26.
Now, unfortunately, because we have had a recent spike in the VIX (the biggest since covid) options are currently expensive, so we can’t get the very low time value we were hoping for.
Here are the current bid / ask from the Schwab website:
Based on this I would suggest you go for the January expiry, as you are getting a whole month time value for very little extra. The choice of the 300 or 355 strike (or anything in between) it up to you and depends on how much leverage you are comfortable with.
Buying SPYG Options
SPYG is currently trading at $90 for the 50% strike is $45 and the 60% strike is $54. The nearest we can get in real life is $50 and $55. SPYG does not give us the choice of strikes and expiries we get with SPYG, so we have to accommodate. I understand that the February options are out, but they are not listed in the Schwab website, so I can’t get prices.
The time value is quite consistent – around 1% every 4 months at the 50 strike and a bit more at the 55 strike. Your choice depends on what leverage you want and whether you are willing to roll out / up after 3 months (if you choose the Sep 25 options)
Buying QQQ Options
The backtesting of QQQ on ITM has not been been published – deliberately so, as I wanted to keep the message clear, simple and consistent. But I have made no secret that I use ITM on QQQ, and it has been rather successful. I tried to get into positions last week – but the lack of connection made it difficult, and I was mostly unfilled because I couldn’t see what I was doing. However, here is the position right now:
Sunday evening in France
I have written this blog on Saturday and put it up on Sunday evening (French time) as I am learning that I can’t depend on connection (Une sacrée tempête, c’est sûr. Évidemment, Internet est mort ! – yes, you can work it out – French uses a lot of English words).
Then I wrote: So, I can’t give you the futures as they are not open yet but will update tomorrow if I can – and send out a special email if the golden cross in confirmed.
Hah! Famous last words!
The Futures
The futures look grim, but they are up slightly from an hour ago, so it may not be as dismal as it looks. However, the chances of us getting our golden cross confirmation for SPY today have receded. They are still confirmed for SPYG and QQQ, so you could look on this as a buying opportunity – but I would counsel waiting a day or so just so that we see how this plays out.
If / when we get the SPY cross confirmed I will send out an special email – however, the pricing will be all different, but the strikes and expiries should stay the same.
OK this has been a bit of a strange blog, written as it was over the last 2 days; maybe it’s the universe telling me not to try to be organized but trust that all shall be well. Maybe.(Hilarious: I had just written that and wifi cut out. Couldn’t upload the image of the futures. OK, working now.)
Meanwhile in Provence
I am still having a wonderful time, Provence is beautiful so much history and wonderful views. One thing I am loving is that being May it is too early for most tourists so I get to have the most wonderful spaces all to myself. I was going to post some here, but decided it was too self-indulgent; if you want to see them they are here: https://www.facebook.com/heather.cullen.756/
But here’s what made me laugh: there’s a beautiful hilltop town called Menerbes, and I was admiring one of the houses, and then I noticed a yellow notice on its gate, so I went to check:
They are obviously getting ready for summer and an influx of tourists!
Fingers crossed for a good week!
Heather
Trade the tide, not the waves
31 Responses
thinking of buying spy using itm for first time. you recommend buying jan 26. would it be ok to buy jul 26?
Ho Charles, absolutely OK – just you may be buying more time than you need, but absolutely OK.
Hope this helps
h
Hi Heather!
It seems like we have our confirmation with the .3% difference of SMA’s. 594×.3% equals. 1.78. The difference of both SMAs equals. 3.99. So am I calculating it incorrectly because you say that we do not have confirmation yet but this is the way that you do it in your book? Thank you! Please let us know when can.
from your book:
So, if SPY was trading at, say, $1,000 then they would have to be at least 53 apart. We wait for this white space, and then buy in the next day.
Hi Eli – think this is a duplicate? Andswer below.
h
Heather,
The more I read your weekly blog, the more I become impressed! Fabulous! Thank you for your hard work and expertise.
Thank you Michael!
Are you buying calls or selling puts? Thanks
Hey George – always buying calls, never selling puts!
h
Hi Heather. I’ve really enjoyed your books (I’ve read them all) as well as your weekly blog. Sorry to bother you with a simple question while you’re on vacation. How do I get on your email list? You mentioned you would send out a special email when we get the golden cross. If you would be so kind, could you please add me to that email list:commented out@gmail.com. Thanks! – Dave
HI Dave – thank you! And as far as I can see you are on the mailing list – I’ve set it up as an automatic process and only get notified of the ones who have failed.
I will be sending out a special email shortly, so if you don’t get that then please get back to me.
h
Dear Heather,
If your travels ever bring you to Croatia, you must swing by Rovinj and stay at our Casa Amando Eco Boutique House — we can provide an ultrawide monitor and the fastest internet in the old town (currently clocking in at 195 Mbps ).
Being based in Europe, I’ve just opened an account with Interactive Brokers. I know you’ve mentioned some frustrations with them in the past, but for us over here, they’re often the most practical choice.
I’m finally starting my ITM journey and would love your take: if you were in my shoes, which of these options would you choose?
SPYG Sep 2025: https://tinyurl.com/5xb33r2p
SPYG Dec 2025: https://tinyurl.com/2jd89zva
Wishing you a fantastic trip—looking forward to your next update!
~ Marijana
Hi Marijana – I think I’ve had contact with you before? Nice to hear from you again.
Re the SPYG option- I think that the September 50 and 55 strikes are good value – but they don’t have a lot of time on them so you will have to remember to roll out by mid July. The December 50 and 55 are slightly more expensive, but give you a lot more time value so you wont have to roll until November.
And well done on deciding to make the leap – you can’t win if you’re not in the game!
h
Sometimes life reminds us we are just little corks bobbing in a great big ocean. Sorry you are getting some rough waves. The Moody’s downgrade may mess up the confirmation. The futures are down as I type.
Enjoy France, live life.
Let us all remember the very best things in life are free: love, laughter, sunshine, singing. Life’s simple pleasures ❤️
Hey Kate! Yes, the Moody’s downgrade was badly timed! But then, when is a good time?
Last year when Fitch downgraded I wrote a blog article on it, here’s the link: https://heathercullen.com/didnt-see-that-coming/
And I love your philosophy: Laughter, sunshine and love – I’m not sure that anyone really wants to hear me singing but I love a good yowl in the car as long as I am on my own!
Thanks!
h
Heather,
I thought originally in your Bull book you suggested high 90 delta. Today you are suggesting 50-60 delta. Do either of your options book address the 50-60 delta? Does a 50-60 delta mean I’m only going to profit 50-60 percent of price, Especially in a short expiry? Thanks for your help.
it is 50% or 60% of the price so if Spy is at 600 you multiply by 600*.60=360 strike
hope this will help
Raymond Limansky
Got it. Thanks for everyone’s clarification.
HI Raymond – thank you – you are absolutely right!
h
Michael,
Heather never mentioned Deltas in the blog above, your choice of options to buy should be 50-60% leverage or in other words, a strike price that is 50-60% of the current price of SPY. In her example SPY trading at $594 so 300 strike is your 50% option, and 350 or 355 is your 60% option. Go back and read the “Buying SPY Options” section in the blog one more time.
HI David – absolutely right, thank you!
h
(Looks like I’m not the first to attempt an answer, but I’ll leave it up 🙂
)
Michael, if I may – in this newsletter, she’s not suggesting the 50-60 DELTA, but the strike price that is 50-60% of the current SPY price. The first one on the chart above, 300 Dec Call (about half the current SPY price of 594) is actually .97 Delta. Hope that helps.
Hi, it seems like we have our confirmation with the .3% difference of SMA’s. 594×.3% equals. 1.78. The difference of both SMAs equals. 3.99. So am I calculating it incorrectly because you say that we do not have confirmation yet but this is the way that you do it in your book. Thank you!
from your book:
So, if SPY was trading at, say, $1,000 then they would have to be at least 53 apart. We wait for this white space, and then buy in the next day.
Hello Coop,
I also show confirmation! My guess is Heather may be having internet connection issues on vacation…
( I believe you meant 3 not 53 in your book example for 0.3% )
Hi Joseph – yes, you are right – bl(*&&^R%^%y comms!
But have updated the blog and am sending out an email shortly.
h
Hi Elijah (?) – sorry, had comms problems – the golden cross is not confirmed and have updated the blog. Sending out a special email shortly.
h
Hi Heather, for confirmation. Do you take the price of SPY and 0.3% or the price where both SMAs crossed and use that for confirmation? Maybe it doesn’t make a big difference as long as we have good separation. Thanks. Jeff-
Hey Jeff – I can’t remember without going back to my books – and I don’t have them with me. Likewise the backtesting – I can’t bear looking at spreadsheets on a silly little laptop.
But they have definitely now crossed – but would have preferred a bit better outcome on the day we entered!
But the market does what the market does – we can only try to sail is without getting wiped out.
h
Hi Scott – absolutely correct, thank you!
h
HI Michael, I never use delta in my calculations – I only mentioned it in the books and pointed out that a DITM options has a high delta, but that I found it much easier to work out what options to buy by looking at the strike as a percentage of the price.
So if SPY is trading at $600, then the $300 strike options is 50% option (it also has a high delta but we don’t use that). If we wanted the 60% option then we would buy the $360 option (which would also have a high delta, but not quite so high as the $300 strike)
Delta simply measures how much the option price changes for a $1 move in the underlying stock, and a high delta means the option behaves almost like the underlying asset.
Deep ITM options have little time value and lots of intrinsic value, so their price moves nearly 1-for-1 with the stock. Which is where we get our leverage in ITM – we use half the money to get all the gains.
Hope this helps
H
Dear Heather,
Thank you for your weekly blogs as well. Please stay safe in France. Also if you have free time, can you cover your weekly blog about the retirement of Warren Buffett after 60 years at Berkshire Hathaway and also the friendship of Warren Buffett and Charles Munger from 1959 to 2024. Thank you very much.
Sincerely,
George Henry
Hi George – thank you. Re Warren Buffett – his main advantage was that he was in the market so long. He started investing at 11 (from memory) and continued all his life, so he had 70+ years of investing.
He spoke of ‘the magic of compunding’ – well, it definitely worked for him. In a previous blog post I compared his results with the average investor who starts at, say, 30 and finishes at, say 65. The difference was marked. Buffett would have amassed $13 million instead of the billions he has now.
I must try to find that blog post as I am relying on memory so the figures may be a bit off.
Interestingly he has stupulated in his will that 90% of any money inherited from him has to go into a low cost S&P 500 Indez fund!
h