The unexpected happens.
And, boy, didn’t it happen last Monday! When I wrote the blog, I had just seen the news about DeepSeek (China’s answer to ChatGPT) and noted that the futures were going down. What an understatement! When the market opened the Nasdaq plummeted more than 3%. Not nice.
Shoot first, ask questions later
This is a jumpy market. It seems to be looking for any reason to have an attack of the vapors. Traders are on edge, doom sayers all around.
But lets be reasonable.
Should we really have been surprised that China was developing AI? And was it really the drama that everyone made it out to be?
Overnight everyone calmed down, took a deep breath, and the next day the Nasdaq went up 2%.
Who got burned?
But it got me to thinking who would have lost money. Nvidia was the hardest hit, losing 17% in a day. If you had an ATM / OTM call on NVDA it would have lost most of its value. Not nice, but the good thing is that with buying options you can never lose more than the amount you have outlaid. However, if you are selling options, it is quite a different situation.
Whoever Was Selling Naked Puts!
Selling naked puts, often touted as a safe way to trade, involves selling put options. When you sell them, you collect the premium, which goes straight into your account, and you never have to give back. That feels nice.
But there’s a HUGE sting in the tail.
When you sell a put, you are obligated to buy the stock at that price if you are exercised.
You hope, of course, that you won’t get exercised, that the put will expire worthless, and you get to keep the premium. Money for jam! Unfortunately, it can turn out to be very expensive jam.
Income Strategy: Selling NVIDIA Options
Let’s suppose that you were doing an ‘income’ strategy where every month you sold put options one month to expiry on a stock. The premium you collect each month is your income and you sell a put that you are pretty sure won’t be exercised, so you sell below the low of the last 3 months. Here’s the 3 month NVIDIA chart on the 22 January:
Looking pretty stable, what do you think? Going sideways, the ideal candidate for a Darvas box. Today (22 Jan), it is trading at $147.07. It hasn’t traded below $129 in the last 3 months. That’s more than 12% lower than today. Selling a put with a strike of $129 should be pretty safe, it should expire worthless. Let’s jump in.
STO (Sell To Open)
We go to the option chain, select the NVDA 129 strike 22 Feb 2025 Put, and see that it has a premium of $0.95, so each contract gets us $95. We decide to sell 10 of them, netting us $950. Right way it is in our account. Yeah! Income strategies are brilliant!
Or not.
Disaster Strikes
As you know, on Monday NVDIA dives 17%. What happens to our option? It is suddenly worth $14.25.
Which sounds good, until you realise that that is what you are up for. You have agreed to buy NVDA at $129 and it is trading today at $118! That means that the trader you have sold to can buy 1000 NVDA stock for $118,000 and immediately sell them to you for $129,000.
They have a profit of $11,000 – and you have just lost $11,000.
BTC (Buy To Close)
Even though we have American options (that can be exercised any time, unlike European options that can only be exercised at expiry) the normal approach is to buy back your option. So, let’s check: today it is worth $14.25. To buy back 10 of them you will need to pay $14,250.
Drama! Of course, you still have the consolation prize of the $950 premium, but you are $13,300 down on the deal. Here’s the option chart (look closely, you can see the big green candle on the right):
Is the MACD still in Bear strategy?
I’ve been asked – are you taking the MACD out of the bear strategy? The answer is ‘no’ for a purely pragmatic reason – the way we use it in the ITM bear works. We don’t use the ‘normal’ ways that traders use the MACD, but in specific situations along with other indicators.
In fact, on page 79 of the hardback, I specifically point out that there are occasions when it works (e.g. March 2020 in the Covid bear), but there are far more where it doesn’t (e.g. the rest of 2020, when there were multiple signals, but none were correct).
Internet & Power
I have felt like I was living in a third world country for most of last week – Internet down and power cuts across the city. I wrote this blog on one of the occasions that the Internet was up.
That meant I could get access to data, but I haven’t been able to double check the figures, so apologies if there are any mistakes.
To the Markets
Given whats happening right now, I would rather look at the week ahead – so that section is much expanded, but of course we have to check the charts:
SPY Charts
Monday’s dive can clearly be seen – and may be emulated this Monday, but more of that later. However, it spent the week catching up, only to have a big red candle on Friday. You can see that it bounced off $610 intraday, but still it finished over the $600 mark.
On the long term chart you can see that it has retreated to the bottom of its trading channel.
SPYG Charts
After making 3 new highs last week, we were cut brutally down to size on Monday – but the rest of the week was pretty good. The red candle on Friday was not as definite as for SPY and we are still trading well above support at $88.
The longer term chart shows that it is still in the middle of its trading channel.
QQQ Charts
QQQ is showing the same pattern as SPYG.
And on the longer term chart we can see it is crawling along the bottom of its trading channel.
VIX Chart
The VIX is not yet showing any jump – but I am expecting that to change today – see the week ahead.
ITMeter
The week ahead
The week ahead – hmm, I am approaching it with trepidation. I wrote last week that the market was skittish, and looking for an excuse to have a tantrum. Well, I think it has found its excuse in the trade tariffs.
When I checked the futures around 12 hours to market open, I saw that the Nasdaq was down over 3%. You have that sinking feeling, followed by frustration: why can’t everyone just play nice??! But, of course, we are not in kindergarten and the real world isn’t like that. We have to take what comes and work out how to navigate it.
As I was going into a facial and a massage (yes, I have a lovely life!), I thought I would ignore it and worry about it later.
Later being now, après mes indulgences (practicing, I’m going to France for all of May!!), I have to look at reality. Its better, but not good.
To make sense of it, I thought I would step back and take a longer term view. Here are some charts which come from Scott Grannis. I have recommended his website before, he does not post very regularly but the perspective he brings is very valuable. Anyway, here they are:
Private Sector Jobs Growth
It is clear that there has been a dramatic decrease in jobs growth over recent years. This is only the private sector, but then it is the private sector that drives economic growth. Job creation in the government sector does not usually help the economy (understatement!).
This is only for the last 3 years, but the longer term figures are that currently jobs are growing at 1.3% annually, and the 30 year average is 1.4% (this includes 3 recessions).
Relative Price Trends
If we look at the price trends over the past 30 years, we see that durable goods (appliances, vehicles, furniture) have come down (we all know that – remember how much PCs and laptops used to cost?)
Non-durable goods (food, beverage, clothing, personal care, fuel) have gone up, but services have gone up even more.
Equity Market Capitalization
The graph below compares the market cap of the US market against the market cap of the rest of the world. The US has just overtaken the rest of the world, and we need to keep this in mind when we are considering the effect of the new tariffs.
Equity Market Capitalization
This is a graph that I find really interesting. As Grannis points out, it is not the actual amount but the cost of servicing the debt. For example, if someone has a mortgage of $100k and earns $50k per year the percentage of income going to service the debt is a lot higher that the same mortgage for a person earning $400k a year.
We are used to scary headlines full of doom and gloom about the debt – which is massive, over $28 trillion (that is $28,500,000,000,000) but as a percentage of GDP it is now lower that it was in the 1980s when interest rates were much higher.
The futures . . .
Well, I have just poured myself a glass of prosecco, girded my loins, taken a deep breath and am sitting down to take a look at the futures. Surely, they have come down a little? Or are they still in full tantrum mode?
OK here goes. Looking now! OK! Woohoo! Not so bad.
Still awful of course but around half what I saw earlier. Tonight is probably not going to be pleasant, but hopefully not a complete wipeout.
Trading is like that: we have to take the bad times with the good, but always make sure we don’t get wiped out. Remember:
Trade the tide, not the waves
(even if they are big waves!)
Heather
Q & A
Sorry, am way behind with answering questions – this internet outage has really upset my apple cart! I shall transfer all the unanswered questions to this blog post and answer them in the next couple of days – but please feel free to ask any more down below.
27 Responses
Dear Heather,
Thank you for your reply, much appreciated. We need to be aware of scamming investors and traders such as Bill Hwang of Archegos Capital, Bernie Madoff, the Enron Scam, to name a few. Please don’t lose money and cash is oxygen.
Sincerely,
George Henry
Was wondering if you mind sharing the electronic files on the ITM back test strategies? I can access the PDF versions, but would rather get the electronic versions. Please consider sharing.
Hi H
I used to – but what was happening is that some people (not you I am sure!) would change a few figures in it, then claim that it didn’t work and that I was fiddling the data. I would spend ages finding out what they had changed, and it was taking up to much of my time – and in any case the damage was done by the claims.
I decided the best way to prevent that while still being transparent and accountable, was to say exactly how it was done, the rules I followed and how the calculations were done so that anyone can make their own system (the rules are in Download ITM Backtesting Documentation so you can easily recreate it yourself.
I published the PDFs just to show that I had actually done it and so that people could check the results.
Hope this helps
h
Does In The Money Bull Market address Spyg as an alternative?
Hi Shlomo, Yes the Bull book covers the SPYG as an alternatove to SPY as the basis of the ITMS (ITM for smaller accounts) strategy.
h
In reply to George Henry.
With so much on my plate … i look forward to see what you’ve written about the market. The stock i was interested in… is making a new high. Netflix. I used to go into Blockbuster to watch the latest Dvd. I had heard that the owner of Netflix had gone to Blockbuster and asked for 50 million to buy out… Blockbuster refused. Is there any Blockbuster stores anymore…
R
HI Rnady – I think this was meant for George?
However, I took the opportunity to have a look at the NFLX chart – interesting! After being smashed in the Buden bear (from $700 to $170) it is back up to $1,000. Interesting – I thought it was on the decline. I cancelled my subscription a couple of years ago, but they are obviously doing something right!
h
I use MACD, but not with the typical settings. Why do what others do or you will perform like others who do not perform that well? I am a Trader and sometimes a very short term Trader. I find my settings do help on shorter term trades, but you must remember it is just an indicator using Moving Averages, no more and moving averages do have drawbacks but often one finds they are the best indicators you can use. Does this make sense?
HI Tommy,
I have tested the MACD with different parameters, but I couldn’t find any that didn’t lose money over the long term. It is ease to retrofit by choosing parameters that work in particular situations but that doesn’t really help us
However, the MACD with standard parameters is what is followed by most traders, so it gives us an insight into their likely actions which can give us an edge.
Hope this helps
h
Hello again Ms. Heather.
I’m chuckling.
“…the government couldn’t organize a p%&s up in a brewery!”
Funny.
Up until very recently, a somewhat similar saying we use here in Indiana applied to our government.
“They couldn’t pour p[ss out of a boot with directions on the heel.”
Our new guy has already been great for the United States of America.
In the end, I think he will be great for the world.
Cheers,
John
Hey John,
funny – same sentiment.
Your new guy is certainly shaking things up – haven’t ever seen a politician move so fast.
I subscribe to The Australian newspaper here, its relatively center with right and left views, but you would be surprised at all the comments saying that we need a Trump here in Australia! Definitely we desperately need a DOGE!
h
Dear Heather,
Thank you for your weekly blogs as always. Speaking of hedge fund, it is mostly rich people’s money so they want to keep it within their friends and families investments and tradings so it can be discrete and confidential. Live well do good works.
George Henry
HI George – it is a mystery how rich people stay rich if they depend on hedge funds to manage their investments!
I must be missing something!
h
ITMB for QQQ:
How well will ITMB SPY rules work for ITMB QQQ?
If ITMB QQQ rules have already been discussed elsewhere, please forgive my oversight and request pointing me there.
Good stuff, all you do.
Cheers,
John
HI JOhn
the quick answer is I don’t know – I have not tested it. I use QQQ in a bull market, but haven’t used it in a bear.
If it looks like we are going to have a bear I most certainly will be testing it!
h
Heather, Sorry for using abbreviations. The DPO stands for Detrended Price Oscillator. Try Barchart.com under the Learn tab for a great explanation. I’ve seen other services use the detrended price oscillator as a timing signal. It will give more signals than the 10 day/ 200 day signal, but since it may be difficult ( or a long time) to wait for a 10/200 day crossing to get in, the DPO will get investors out of their position with a small loss of profits, and then back in when the market recovers. It may not be appropriate for the investment model you have given us, but it may be helpful.
Sorry – I think I have got these answers out of synch. WordPress comments widget is incredibly clunky!
h
Dear Heather, I follow and appreciate your weekly comments. Since the last IN signal of 7 November 2023 you have no doubt closed out your option contracts and bought new ones simply because they were expiring. Each new set of option contracts would have been bought at levels far above the 10 day/ 200 day SMA classic entry point. Is your exit point on a decline still the crossing of the 10 day below the 200 day? It would seem that you would likely incur a significant loss. I have considered using a 20 period DPO below zero as my exit point and subsequent crossover to the upside as my entry. Any thoughts? Thanks for your insight.
HI Bill – sorry for late reply – had to go and check out what the DPO is – see response to your next question.
h
HI Bill, in answer to your questions:
1. you have no doubt closed out your option contracts and bought new ones simply because they were expiring – yes, that is right. For the purposes of the blog I still count it as the same trade.
2. Is your exit point on a decline still the crossing of the 10 day below the 200 day? Yes, both as the IN sognal and the OUT signal. If you use different signals for in and out they may not be mutually exclusvie and you will have one indicator saying it is OK to get in while the other thinks you should be getting out.
3. I have considered using a 20 period DPO below zero as my exit point and subsequent crossover to the upside as my entry. Any thoughts? it may well work (although I have doubts as DPO is a lagging indicator) – to test it would require a rejigging of the backtesting to generate new buy and sell symbols – something that requires me to use my brain, and it is already in counting down to travelling mode! I would probably do a quick eye-ball backtesting for, say, 10 years, to get an idea if it would work or not. If it looks promising then you can set up a backtesting model your self – download the Backtesting Documentation and substitute rules 2 to 6 of the Rules and calculations and then use the rest of the buy and sell rules as is. An added complication for me is that Optiongear, my charting program, does not have DPO as an indicator, just a standard oscilator so I can’t quickly do an eyeball test.
In general, I think the simpler the method is the closer you are to what is actually happening – but that’s just my bias.
If you do the backtesting please share the results with us!
Thanks!
h
testing
Thanks, I enjoy your blog. I’m a cash secured put seller in the U.S. and rolling out in duration is a valuable tool. Over the past few years, my portfolio has basically matched the market (up 15%), doing better in bear market and worse in bull market.
Hi Jeanette, if someone is experienced and is totally aware of risk and how to mitigate it (which you obviously are otherwise you wouldn’t have survived!) then it can work – as you have proved.
I just worry about people who have less experienced and who may be following some guru or website pushing these strategies as ‘safe’ to people who trust them. I remember one such firm, very popular in Australia in the 2010s, whoc ran huge seminars, promoted the strategy of selling naked puts (against CFDs!) and there were many stories of people who lost their shirts.
They were deregistered in 2022, so I guess it caught up with them.
But if something is working for you, that’s great.
Do you do it on stocks? ETFs? Thanks!
h
If anyone is interested in learning more about put options and a good strategy for using them I would recommend the book “Put Options “ by Jeffery Cohen. It is an older book and out of print but you can still purchase it on Amazon. He lays out a good strategy for selling long term puts on quality stocks and buying protective puts on indexes. He also has back tested the strategy. I found it a good read and worth the time and money if you are interested in learning more about writing cash secured puts.
Hi Jim
I had a look on Amazon, and yes it is only available hardback. I read his blurb and checked his website but it is no longer there, and his LinkedIn profile looks like it hasn’t been updated for some time.
I started digging – and suspect he is this guy Jeffrey Max Cohen whi has been permanently disbarred from acting as a broker associating with a broker-dealer firm. Here’s the link: https://brokercheck.finra.org/individual/summary/2528929 .
Perhaps his book has a good strategy, but I would be careful about following his advice without doing the backtesting yourself.
Hope this helps
h
Dear Heather,
Thank you for doing due diligence for us regarding Jeffrey Max Cohen. Much appreciated. I trust you and Warren Buffett and Charles Munger because you have proven with your track records in investing and trading.
Sincerely,
George Henry
Hey George!
It is surprising how many – how shall I say – ‘questionable’ traders have written books, which is fair enough they can write what they want – but the tragedy is that people believe them and follow them . I think I covered one a few months ago whoc had thousands of people following him and he got wiped out – which means that they did too.
And funnily enough at the time, I was tracking down an Australian guru that was very big a few years ago. I actually attended his seminars and was a client – but after seeing the way he was teaching people to trade I ‘uncliented’ myself.
Strangely, he is now very hard to find and I don’t think he trades any more – he has changed his name from ‘Daniel’ to ‘Savannah’ and undergone a sex change!
Life is strange.
h