Options Insights: For the Longest Day of the Year

June has always been my favorite month of the year since as long as I could remember. The days are long and the nights remain fairly cool before the July and August heat get underway. My birthday also falls in July so June is a great month of reflection both for my personal growth as a trader as well as a reflection on the half-year mark.  

As I look upon my eminent 50th birthday and what this first half of the year has brought into the markets, there are a couple of themes I would love to share.  First, markets can surprise you in the darndest ways.   

The NASDAQ 100 is up 28% as I sit here and type this and that surely was the furthest thing from my mind at the beginning of the year (see below chart).  With interest rates soaring and high inflation, it was something I certainly did not expect. In this type environment, one would expect non-cyclical stocks and dividend producers to outperform. Capital intensive tech stocks that need lots of financing should underperform in markets like this. Who am I to judge? From my 25 years of experience, the market rarely gives me what I do expect and often quite the opposite! 

Nasdaq 100 ETF compared to the S&P Dividend Value ETF

It turns out that money has to go somewhere. If you can get 5% on US Treasuries, why would you waste your time on risky dividend stocks that don’t yield much more? Because of this technology stocks were the only game in town when it came to trying to chase returns. The AI and EV crazes surely added to the buying pressure.

The second surprise of this year came in the form of the volatility index or the VIX. A high inflation, high rate environment usually calls for a very jumpy VIX. Instead of volatility, we got a range-bound S&P 500 and a fairly boring first half of the year for the Dow Jones. Although volatility tends to show up when you least expect it, what I did expect was some degree of elevation as we worked out inflation and higher rates. The complacency of the VIX certainly surprised me as well ( see below chart).

One of the most important things you can do as a Trader is self-reflection. Making changes in real time is the key to success and becoming both consistent and profitable. Ego does not get you paid, it’s not a matter of being correct in your assessment of markets but rather how fast you make changes in this dynamic fast-paced environment. 

This is where practice and experience comes in and allows me to be incorrect in my early assessment, but still be successful in my career as both a Trader and a coach. 

Bottom line: We must always trade what’s in front of us. What I see now is a NASDAQ that is tired but can certainly move higher. In situations like this, I do short-term credit spreads where my timing and direction does not have to be perfect. Without options trading you have to be correct on both when you go on the short side of a counter-trend. A good example of this was an Oracle trade I recently posted on the Discord channel (see below).

It surged after earnings and finally ran out of gas, but on the short side remained a scary proposition. By using a credit spread, I am able to earn while I wait for it to roll over and potentially get more aggressive if that long overdue corrective action occurs.

Trades like this might not be the most glamorous, but they are the most necessary in overextended environments like this. As I look towards the second half of the year (and my life), I am both honored and thankful for being a part of this amazing community. I look forward to the next half year and what lies ahead, and will always be here for you to tell it like it is, not what I wish it to be.  The opportunity is always there; we often just have to look past our own opinions.

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