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Options Theory: Adios Election, What Now?

November 5, 2020

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I’m continuing my string of practical blog posts with another on my trading thoughts and movements now that the Presidential election is behind us.

If you missed Monday’s Tales of a Technician article outlining my pre-election positioning, go read it. It sets the stage for today’s follow-up.

Let’s begin with a note on the philosophy and process undergirding my trading.

Signals versus Noise

First of all, if you don’t have a process in place for determining market bias (that is, where you’re a bull or a bear), then I think you’re sunk before you even begin. Successful traders only achieve this coveted status because they have a consistent process based on rules and logic. This stands in contrast to unsuccessful traders who are tossed about by the fickle and ever-changing news stream.

Headlines provide context and stories. A carefully curated intake of news can help explain the narratives driving prices. But don’t trust them too much. And don’t delude yourself into thinking you’re not making money because you’re consuming too little.

“If I could only watch CNBC all day long. Then I’d have an edge and know whether to buy or sell!”

Musings of the delusional

Yeah… right.

In my experience, drinking deep from the fire hydrant of news sates your curiosity, but it provides few if any trading signals.

Those, my friends, arise from price. And the head nods and hand waves emanating from the market in recent weeks have been volatile, but oh so telling.

Price Shenanigans

When SPY cracked the 50-day moving average on October 26th, I got defensive by reducing exposure and lowering my portfolio delta. I was still bullish, just less so.

Then, when the VIX spiked past 40, I followed my playbook (outlined here) by closing a bear profitable bear trade and anticipating a market rebound.

Yesterday’s push above the 50-day in SPY officially laid my bearish worries to rest and I’m now an unapologetic bull.

Do I regret pulling in the horns late last month? No way. In an alternate universe the market could have puked on the election turning the 8% pullback into a 20% bear market.

I’m not mad that my actions didn’t make money this time because I know that my process is sound and when properly followed makes money over time. That’s the key. Sure it sucks that the market scared the children and pushed into a downtrend right before rocketing back up. It would have been far easier to trade had it remained in an uptrend heading into the election.

But sometimes the market gods makes you earn your keep. This is one of those episodes.

I laid out all my pre-election positioning here. Below, I’ll provide an update.

What Now?

Let’s start first with the passive account that is full of stock ETFs,corporate bonds, REITs, gold, and a few condors. I didn’t do jack ahead of the election and I’m not doing nothing afterward. Truth be told, my answer to the question “what are you doing?” with your passive accounts ahead of (insert scary event here) is always NOTHING.

I build my portfolio based on my plans to achieve long-term goals. The goals haven’t changed, thus I don’t touch the allocation. Got it?

The active account is where the conversation gets interesting. I’m prefacing my comments with the reminder that none of this is investment advice. It’s an illustration meant to enlighten, nothing more.

Covered Calls

Silver (SLV). What a delicious move! I’m short the Nov $26 call and sitting tight. Still plenty OTM. If we push to $26, I’ll roll up and out to December. To increase exposure on the breakout, I added Dec naked puts.

Emerging Markets (EEM). While the U.S. has played rope-a-dope with investors, foreign equities are taking flight. EEM just breached the surface like a whale from the deep. Prices just blasted through two-year resistance. What’s the opposite of bearish, you ask? EEM, homie!

I rolled my covered calls up and out to December and added naked puts for good measure.

Small Caps (IWM). The little guys have taken over. They’re spry and hungry to make up for lost time. Did you know if IWM’s post-COVID trajectory mirrored the S&P 500 that it would be at $195? But it’s not! It’s underperformed for ages. IWM is at the same price it was nearly three years ago. Some leadership from this sector of the market is a welcome change.

I rolled my covered calls up and out to re-up my bullish exposure.

Bull Puts

My one bull put that escaped the October correction moved toward its target. It’s on DIS. I rang the register after this week’s pop and deployed a December to keep the cash a flowin’.

Everything Else

Shares of KO, VZ made a comeback this week. No change here.

RUT condors lost a touch but it’s typical when you get a such a strong up move. Letting these ride per the plan.

I’m digging the breakout in silver and gold so added some stuff on GLD.

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One Reply to “Options Theory: Adios Election, What Now?”

  1. MichaelProkop says:

    I appreciate the detail and contentedness Tyler. Enjoying seeing the process and masterly work done here. Thank you!

    Looking over your shoulder,

    -Scared Child 🙂

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