3 Options Trading Catalysts 10-2-23

Markets continue to have bearish sentiment: 3 temporary catalysts remain.

Although the NASDAQ and the Russell 2000 remain flat on the week, the broad S&P 500 was down -0.74% and the Dow Jones lost another -1.29% respectively.

The tremendous dollar strength over the last couple of weeks (see below) finally caught up to gold, which tends to be inversely correlated.

The precious metal lost close to 4% on the week (see below), thus eliminating any bullish thesis I had earlier in the month.

There are three things that are going on right now in the markets that we need to be aware of that are causing sentiment to drift negative. First is the looming government shutdown which historically tends to cause markets to drift lower as political wrangling and posturing continues.

Second is the United Auto Workers strike that has not been resolved yet. Although it’s limited to one sector, this type of controversy can spread to other manufacturing groups and industries as well.

The changing workforce dynamic combined with uncertain stay-at-home policies for many organizations will probably lead to further workplace conflicts between management and employees in the future.

Lastly is the seasonality factor of where we are on the calendar. The first two weeks of October tend to be a lousy time historically to buy equities, and this year seems to be no different.

All three of these factors have contributed to sentiment shifting from positive to negative in recent weeks.

The good news is this: All three of the things I just mentioned are temporary and will most likely be resolved by the third week of October right as we are into the earnings season.

Although energy continues to be the strongest sector, oil did seem to show some fatigue this week so I am urging Traders to lighten up or take profits in the energy space (see below).

For options Traders it’s very important to look at the VIX in order to see what type of volatility environment we are in.

With the “fear gauge” flirting with 20 and putting in a “lower shadow” candle on Friday (see below), we may see a continued spike in volatility.

Seeing the VIX perk up like this, as an options trader, is important to change your overall strategy when deploying capital. An elevated VIX means elevated premiums, and elevated premiums mean options are expensive compared to where they were a month ago. This is the same for both puts and calls.

This means that for the most part buying straight calls and puts are out of the question.

Spread trades including more credit spreads as an overall strategy will allow you to sit through a bear rally and not get stopped out.

Having that short leg allows you to receive premium and sit through volatility at the same time, and allows time to pass without theta decay getting in the way.

An example of this on the long side would be AKAM, which has shown remarkable relative strength despite markets drifting lower.

With overall markets not behind us, it may take more time for a stock like this to reach its target. To allow for time and volatility to play out, a spread strategy makes more sense In the short term. (see below).

If this trade plays out and continues to rise, you can pick a secondary longer term target (see weekly chart below).

In conclusion, I will be watching markets closely this week to see if the three catalysts mentioned disappear and if positive sentiment can return. If not I will remain bearish and look forward to a nice bumpy earning season!

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