Daily Plan 7.17.24
Welcome back everyone!
Another session is behind us, marked by clear volatility compression, which I mentioned in chat. This compression is pushing indices higher, whether through rotation from the Emini to the Russell. This phenomenon is common as highly shorted stocks by institutions often experience a squeeze. When there is selling in the tech sector, there needs to be an equal weight of stocks rising to maintain an uptrend or even a chop. Compare the indices to tech stocks; despite the significant weight in tech, we have seen no selling in the indices. In the next week or two, we expect strong flow back into tech, driving the indices into the next leg up. Let’s take a look at the VIX to illustrate this volatility compression.
Too often, I see people online claiming that the VIX is too low and predicting a major spike in volatility. The reality is that when the VIX is this low, it tends to stay low. My main focus on the chart is not to anticipate a breakout but rather to observe how this could result in a slow grind higher for the indices. Over the past couple of weeks, this is exactly what we have seen, and this trend is expected to continue. A slow grind higher means that the indices will experience very limited volatility but will ultimately continue to rise. This environment makes it much tougher to capitalize on large moves with options.
Additionally, there is supported flow for this uptrend to meet my 6000 target on the S&P 500. I have reiterated this target for the end of this quarter, with an expected 700-1000 point sell-off in Q4. The details will be covered exclusively for paid subscribers, but I wanted to share my thoughts on the current market with everyone.
Now, turning back to the chat.
Everything mentioned above explains why SPX contracts, including SPY, are not moving like they were a couple of weeks ago. When volatility is low, you typically get one strong move per session or chop for a few sessions followed by one explosive trend day. The chart below highlights this and supports the volatility compression that I discussed at the beginning of this post.
The majority of this chart reflects low volatility, which is not very favorable for options trading. The main issue is that most traders are dealing with options rather than futures. When I first launched this newsletter, I primarily focused on futures. However, due to high demand, options have become the main topic of our chat updates. Besides the intraday levels posted at the bottom of each post, the updates now primarily cover intraday structures. The lack of volatility is eroding premiums right up until the close. You either catch a sharp move and capitalize on it, or you watch the price slowly grind higher as decay eats away at profits. This market is very challenging for capitalizing on intraday contracts.
On the other hand, this environment opens up opportunities to focus on swing trades. Using the supports marked on the chart along with intraday levels while trending, you can achieve a robust risk-reward ratio with swings. Decay works more in your favor compared to options, but nothing compares to futures where there is zero decay. I highly recommend that if your account is large enough, focus solely on futures and use a small portion of capital for options once volatility increases. The hit rate for options is lower, but the risk-reward ratio is much higher. However, if you want to avoid the worry of decay eating into your profits, futures are the way to go.
Let me be crystal clear: in the past, my focus was on advising you to invest while building capital so you can trade futures. I still stand by this advice. Do not seek out prop firms to trade with. You need to trade your own money and understand its value. Prop firms create the illusion that you can easily get a $50k account back for just $200, which fosters a careless mindset. This is the exact opposite of where you want to be.
I've certainly talked a lot today, but there's plenty of valuable information above that can help every single one of you. This information will be useful in the chat on a daily basis, providing a better understanding of all the option setups we discuss.
Now, let's move on to the chat updates sent out today.
Overall, it was a short day in terms of updates. AMD sold off today, and I called out Calls hitting the stop. AMZN experienced sharp selling as well, with a large gap back up this morning to this week's highs. Calls were green but, once again, the gains were short-lived. The thesis behind this trade was very simple: the stock remains bullish, holding at highs, with a target just below 200 where Bezos is an active seller. We will have to wait and see if we get a strong move tomorrow; otherwise, these positions will likely be cut. The AVGO swing, which was over 100% last week, has taken a significant hit on the runners. It's still green overall, but not as much as before. I want to see follow-through to the upside tomorrow, pushing the price back up to 176. I'm not opposed to closing the rest of the position there and rolling to a further expiration, roughly two weeks out. This will be updated in the chat.
Now, moving on to what was sent out today regarding SPX. First, I will cover the screenshots, then get to the explanation.
The 5630 puts jumped to 7 just 7 minutes after calling them at 5.4, falling short of my expectations. Price rallied back to the highs on SPX, prompting me to send out an update expecting sellers to step in and bring the price back through the lows. Unfortunately, we sold down to the lows but found support once again. Later in the day, after moving up to the high, I called out Calls, which worked out and hit my target. However, due to the dry volatility, it took the remainder of the session to reach my target at 5719. Although the additional contracts were not held, they would have worked perfectly, moving up 1,000% after selling. The purpose of the addition was simply to cover the cost of entering the first set of calls as we approached the close and were trading at a key intraday support at the time. The spike came just as expected and put that addition just over 100%. Price then continued higher, moving up to 1.8 for a small gain on the base position before moving right back down.
That’s all for tonight, time to get to the analysis for tomorrow.