TRADE UPDATE – VXX BEAR CALL SPREAD
I don’t usually comment about trades in the weekly update, but this one moved so much after the e-mail alert went out, that I thought it would be worthwhile providing an update for anyone that didn’t get filled on Friday.
Basically, VXX rose so much going into the close on Friday that the current premium available is now significantly higher than even the top end of what I originally published. So, I wanted to give some updated guidance for anyone that’s looking to get into the trade on Monday. Keep in mind that if the market continues to tank next week, even better results may be possible.
I see two potential options for anyone that chooses to try the trade next week:
Option One: Higher Premium for Same Spread
Thanks to VXX closing above $27 on Friday, compared to the ~$26 level it was trading at when we released the recommendation, you could have written the call spread for $3.65 or higher. Tip of the hat to Tetsuya, who managed to do even better!
If the market looks like it’s going to open lower, be patient and look for a spread credit in the $3.8 or even, potentially, as high as in the +$4 range.
This will reduce the capital-at-risk to a maximum of $2620, increasing the (simple) yield to ~$12.2%.
Option Two: Greater Margin of Safety
Alternatively, you could look to make the same or even a bit more than our original target premium income ($325 to $350) by selling the $26 or $27 December 15 call, instead of the $25. This will simultaneously lower your total capital-at-risk, increase your effective yield in the trade, and also give you a higher price that VXX can be trading at on December 15 at which you would still breakeven on the trade. You would effectively be earning the same premium for lower risk.
Do let us know on Discord what you end up doing. For official SSI: Ultra track record purposes, we will be going with the $25 – $55 bear call spread that both Rich and I opened on Friday.
Investors’ portfolios got hammered this past week, as all three major indices fell more than -2% and both the S&P 500 and NASDAQ fell into official correction territory, as the two have now declined more than -10% below their most recent highs hit on July 31st.
Given the carnage in the markets, investors could be forgiven for missing out on the positive trends that emerged from the 3rd Quarter earnings reports released last week.
With almost exactly half (49%) of the companies in the S&P 500 having reported, both the number of positive earnings surprises and the degree of these earnings surprises are above their 10-year averages. According to LSEG I/B/E/S, of the 245 companies reporting to date:
– 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 74%.
- Reported earnings are 7.7% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.6%.
As a result, the index is reporting higher earnings for the third quarter today relative to the end of last week and relative to the end of the quarter. The S&P 500 is now forecasted to report year-over-year growth in earnings for the first time since Q3 2022.
The estimated earnings growth for the third quarter now stands at a revised +2.7% today, compared to what was previously an earnings decline of -0.4% last week, and an expected earnings decline of -0.3% before the reporting period started.
So far, eight of the eleven sectors are reporting year-over-year earnings growth, led by the Communication Services, Consumer Discretionary, and Financials sectors. On the other hand, three sectors are reporting a year-over-year decline in earnings: Energy, Materials, and Health Care.
The good news in earnings trend aside, and despite all the red ink, the retreat in large cap stocks appears like a mere wobble when compared to the travails of small cap stocks this year. On Friday, the Russell 2000 dropped to its lowest level in almost exactly three years, back in November 2020. Since July 31, the index has dropped over 18%, and it’s down almost -7% for the YTD.
Scary stuff and totally in fitting with the Halloween theme this week… Best to keep reminding ourselves that we (still) have that strong seasonal trend on our side.
Looking ahead this week, it would be prudent to expect more fireworks in the markets this Friday; the pending release of the much-anticipated October jobs report could trigger another leg down for stocks if there’s an even bigger surge than September’s surprising large number.
Finally, we have another busy schedule of earning reports for this week…