Marking Time
I had planned to do this blog on confirmation bias and narrative fixation, but given what is currently happening in the world, that all seems a bit irrelevant. The Iran / Israel situation has rapidly evolved, and the outcome seems certain, but how much damage can be done in the meantime?
Th Straits of Hormuz
At the bottom of the Persian Gulf are the Straits of Hormuz, and 20% of global oil consumption passes through the strait daily. Iran has, in the past, threatened to close this which would cause an increase in oil prices which would reverberate throughout the world.
Bottleneck
The strait is very narrow, with the shipping lanes only 2 miles wide in each direction. It is also very shallow and so could be blocked by the sinking of a couple of ships. This would only be a temporary disruption, but it could roil markets. I am sure that there have been plans drawn up for just this contingency so let’s hope that if it happens it is a short-lived blockade.
Watching and Waiting
Seems to be the best thing to do now. I am optimistic in the long run but suspect that we are in for a couple of weeks of volatility.
So far, the market has been relatively stable, just marking time.
Let’s hope that continues.
To the markets
The Fed decision not to change interest rates was not unexpected – clearly, they had to assert their ‘independence’ and show that they were no subject to political influence. I have read elsewhere that there is a split with half wanting to reduce, the other half not. How reliable that info is I have no idea.
SPY Charts
The market has barely moved in the last month, which is amazing considering everything that is going on. The positive gap between the 10 SMA and the 200 SMA is still about $20 so is unlikely to be close this week even if there is a sudden drop (which hopefully will not happen). Volume continues above average, signaling that investors are not scared away from the market.
The longer term chart shows continuing hesitation at the 600 level.
SPYG Charts
SPYG showing the same pattern as SPY, but with a slightly larger space between the 10 SMA and the 200 SMA.
The longer term chart shows that SPYG has still failed to pierce the uptrend from the underside, and that is is still proving resistance.
QQQ Charts
I have made the daily QQQ chart more condensed that usual so that you can see the resistance at 540. It has bumped up against this 3 times now. The first time was a classic ‘double top’ but now that we are at that level again that is not in force. Either we make a ‘triple top’ or we burst through to new highs. Guess which option I am hoping for!
And on the weekly chart we can see that, as for SPYG, the uptrend (red dashes) is proving to be resistance.
VIX Chart
The VIX has popped up over 20, so we are out of low volatility territory. I’ve drawn in a tentative uptrend which seems to have been developing over the last 6 months.
ITMeter
The week ahead
Here’s a quick summary of what’s happening this week:
Mon 6/23 | Flash PMI, Existing Home Sales, Fed speakers |
Tue 6/24 | Powell before House; FedEx earnings; Consumer Confidence |
Wed 6/25 | Powell before Senate; New Home Sales; Micron earnings |
Thu 6/26 | GDP & Durable Goods data; Nike earnings |
Fri 6/27 | Core & headline PCE inflation; Personal Income; Summary of the week’s data |
The futures . .
The futures are up slightly – but still 3 hours to market open.
This blog coming to you from . .
The middle of the Labrador Sea, docking at Greenland tomorrow.
Evidently the 2 ports we were supposed to visit are blocked by ice, so we have to go further north.
I am writing this looking out at blue sky and blue water – a lovely change from the fog that has been following me since New York.
No icebergs sighted yet! Hopefully soon!
Fingers crossed for a good week!
Heather
Trade the tide, not the waves
10 Responses
Heather,
I have just read, re read, and listened to ITM, made notes and highlights. I love your Deep ITM 6-12 month plan using a simple, rules-based, buy & hold (& watch), strategy, and you have meticulously tested and proven it to be low-risk and low-maintenance. Whats to not like? Your logical explanation of buying intrinsic value and using SMAs for entry and exit make protective puts obsolete. And, with Andrew Carnegie, you showed how a diversified account helps to achieve mediocrity. Thank you for your elegant and practical strategy, and for your clear and engaging style. I have many more good things to say, but Ill write again, later.
For now, Thank you, and safe travels.
David – thank you! what a lovely comment to read!
I really appreciate your taking the time to write it.
Thank you!
x
h
What’s the maximum drawn down of this strategy?
Luan
Hi Luan
I you had read the books you would know that there is no maximum drawdown, that’s not how ITM works.
You can, however, recreate the backtesting (instructions on the website) and work it out for yourself if you think it important.
h
Hi Luan,
I ran a backtest using the crossover strategy on BackAlpha:
https://backalpha.com/strategies/crossover
I tried to replicate the results described in the ITM book. Here are the findings:
2x leverage (modeled as buying ITM call options with a premium equal to 50% of the stock price):
Annualized return: 12.19%
Maximum drawdown: 38.11%
3x leverage (ITM calls with a premium equal to 33.3% of the stock price):
Annualized return: 14.35%
Maximum drawdown: 51.13%
Key assumptions used in the simulation:
Uninvested cash earns 4% annually (simulating interest from sweep programs)
2% annual time decay for 2x leverage due to option theta
3% annual time decay for 3x leverage (higher leverage leads to higher strike prices and more time value erosion)
Let me know if you’d like to discuss the setup or results further.
Hi Tyler – I am on holiday, so do not have access to my usual PC and big screens so can’t comment on the backtesting – othrer than to say that the full parameters are on the website – you can download them here: https://heathercullen.com/backtesting/ – choose ‘Downlload ITM Backtesting Documentaion’. The parameters for rolling up and Out, the time value assumptions etc are all there.
Just a point – the 3* leveraged DITM calls would be a 66% strike.
If you ca have a look at the backtesting rules, and can replicate all of them on BackAplpha please do let us know – rolling up is a part of it – and of course, in real life we would not hold cash but either buy SPY stock, or SPYG options. All the exits and entries are there so you can match them with your backtesting.
Hope this makes sense – backtesting questions when I can’t access my backtesting satisfactorily is always a problem.
h
The 2nd aberration… 1st it was the tariffs now it’s the Iran – Israel war…
Egads what’s next? I enjoy your blog. Happy safe travels! r
Hey Randy – currently in Akureyri (north coast, Iceland) with very dodgy internet connections. My Australian phone no longer works so have to rely on ship satellite. hmmmm.
The Iran / Israel thing seems to have sorted itself out – certainly the market thinks so!
But I’m sure there will be another drama just around the corner.
x
h
Hello Heather, just had a quick question about your ITM option trading. Do you usually sell or buy ITM options? If you do sell ITM options such as covered calls, do you ever buy any protective puts?
Thanks, Gerald
Hi Gerald, ITM buys options, never sells. It doesn’t use covered calls against the options – there are several blog posts about this – here’s the most recent: https://heathercullen.com/income-strategies-2/ . And no, never buy protective puts – the last time I covered them in the blog was: https://heathercullen.com/elections-markets/
Hope this helps.
h