Dan Passarelli, CEO - Market Taker Mentoring

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You can learn a lot by watching what the professional traders are doing. I've been watching closely lately, and today is a great example of how watching what the big guys are doing, or big gals are doing for that matter, can really help guide your own trading.

I noticed that there were a few, a good handful of really big call credit spreads that traded today in some names that really took off pretty greatly back when lower interest rates were a thing. Before there was worry about interest rates coming up and rising and before they did start coming up and rising. Names like ExxonMobil, which is one of the, of course, stocks that is big in the energy complex.
That one had a call credit spread trade today, a rather aggressive one that traded in this Friday's, expiration, August 26, expiration selling the 93 calls and then buying the 95 calls. So that one, the short strike is actually in the money just a little bit, at least at this point. Also, we've seen some good action in some of the airline stocks. American Airlines had a call credit spread trade. This week's expiration selling the 14 strike and then buying the 14 and a half strike.

The 14 strike, of course, has the 50 day moving average at it. That stock blew south of just today. And then the other airline was United Airlines UAL with yet another call credit spread. Now, some other companies that benefited back when interest rates were down really low was some of the tech companies like Pinterest here, for example. Pinterest, back just in April, was up almost around 28 and is today trading around 21.

The charts a little bit skewed here because we got the 200 day moving average taking up a lot of real estate on the screen. But in Pinterest someone sold today the September 22 expiration. That was the longer term one, selling the 22 and a half calls, buying the 25 calls. So what do we make out of all this? Well, with Friday's route and today being down over 2% in the S & P 500, I think that there's a lot of fear of interest rates rising still more and the economy doing worse.

And all the good things that helped these companies back when interest rates were low are coming to roost and hurting them now. But we're options traders. We can make money whether the stock goes up or down. And the pros are betting to the downside. I hope that helps.

Before you leave, I want to point out that credit spreads are something, one of my favorite trades. And so this Thursday, I am having a webinar specifically talking about credit spreads and a new methodology that we use to find them and to trade them. And I'm really excited to share this with you all you have to do is stick around and sign up for this complimentary webinar here.

Dan Passarelli, CEO - Market Taker Mentoring

⇐click the image to view the video and then watch fullscreen to see the charts

Dan Passarelli, CEO - Market Taker Mentoring

⇐click the image to view the video and then watch fullscreen to see the charts

Dan Passarelli, CEO - Market Taker Mentoring

⇐click the image to view the video and then watch fullscreen to see the charts

Let's talk about one of Dan's favorite strategies. It's a strategy that's working really well in this market and has been for a long time and, in fact, pretty much works in all markets.

It's called the credit spread. It's probably one of my most commonly traded strategies. One of the reasons for that is they're high probability trades. When you set them up correctly, you should have significantly more winners than losers. A lot of people make mistakes when they're trading credit spreads and they don't follow, really, best practices. One of the advantages of trading credit spreads is that you make money as time passes. But sometimes people put too much emphasis on that and look at that as the be all, end all.

We also want to put on credit spreads to get what's called an edge or a statistical advantage. Just this idea of making money on time passing, time decay, theta, isn't the be all end all because on the other side of that is movement hurts and you stand to make less than you stand to lose. So that's sort of the trade off. That's why you get the benefit of time to pay. So what we really want to do is we want to put it on for an edge.

One of the ways we do that is by using a volatility advantage, by only putting on credit spreads when implied volatility is overpriced. If you do that, you're actually selling the credit spread at more than it's worth, more than you should be, which actually makes your theta higher. We're going to talk a lot more about this in future videos and webinars that we have coming up. But I wanted to throw that out there and put credit spreads on your radar because they are just such important things to be good at. Hope that helps. 

Dan Passarelli, CEO - Market Taker Mentoring

⇐click the image to view the video and then watch fullscreen to see the charts

Did you ever wonder, hey, how much is the stock likely to move today? Well, I've got a little tip for you. We can take options volatility data and simply translated from the units that it's in into a one day volatility, a one day standard deviation.

Both historical and implied volatility are both the annualized standard deviation based on the past month of price movements. So we can take either historical or implied volatility. Those would give us different results, and we can talk about that maybe in another video. For today, let's just use historical volatility.

We can say, hey, historical volatility is 26.7%. We'll just round it to that. And because that's the annualized figure, if we divide by the square root of the number of trading days in a year, that will give us the one day expected volatility move. So there's a couple of things to unpack that are really important. First of all, how do we get the square root of the number of trading days?

How many trading days are there in a year? Well, there's basically about 256. We're rounding there, but the square root of 256 just happens to come out to a pretty little 16. So if we take 26.7 divided by 16, that's going to give us 1.67. Now, recall that volatility figures are percentages, so that means we would expect, on an annualized basis, the stock to move 26.7%, but in one day, we would expect it to move 1.67%.

Now, when we say expected move, what exactly does that mean? We're talking about a one standard deviation. So that's not some guarantee that it's going to move that much. What it means is that about two thirds of the price movement over time would fall up 1.6% or down 1.6%. 

So that gives us sort of a likelihood of where most of the time the price is going to be. And it becomes very, very useful information whether you're trying to manage your delta versus theta or you're trying to manage your theta versus your gamma, if your short options and lots and lots of really useful techniques there. So we can talk more on that in the future in some of our classes, I hope that helps.

Dan Passarelli, CEO - Market Taker Mentoring

⇐click the image to view the video and then watch fullscreen to see the charts

This morning we had the housing data. We had housing starts, USA housing starts, and USA building permits. And this is some very relevant information, even if if you're not into real estate, even if you're just investing in the stock market, for a few reasons.

So as far as the housing starts go, for July, we had 1.446 million housing starts versus 1.54 million estimated. So we had fewer new homes being started to be built than were expected. Now, as far as building permits go, which is sort of the step before building a house, for July, we had 1.674 million permits versus 1.64 million estimated. So a little bit more than estimated. So now all that said, one was less than estimated. One was more than estimated, but both were drops.

Housing starts dropped 9.6% and building permits dropped 1.3%. Now, how that all comes into play is well, let me first show you the net effect of how this comes into play. If we look at some of the top REITs, okay, so REITs are real estate investment trusts, and it's basically a big fund that invests in a lot of real estate.

The biggest one by marketcap is American Ttower; symbol AMT. And you see that one's just sort of been climbing, I mean, really all year with some ups and downs, but we can really draw a couple of nice, really straight lines since June. This is a six month chart. In fact, if we take this out to a one year chart, it might be a little bit more relevant. We see that it sort of started dropping here in February and then has been making its way back. If we look at another read, let's just go back to the six month version of this because I think it's a little bit more relevant.

This is symbol PLD, which is prologious that has just been really steadily climbing since June. And let's just look at one more here, Crown Castle, CCI. And that one's been pretty steadily climbing. Now, why is this? It's kind of interesting.

We're seeing fewer units being built, fewer permits being applied for. Well, that in and of itself is the reason. If we look at a five year chart of existing home inventory, okay, so this is the number of houses that are out there back in 2018. I mean, these things are a bit seasonal. It always kind of slows down in the winter.

People tend to not shop for houses in the winter, at least in the north where I live. And on average, this map proves that, right? So 20, 18, 20, 19, 20, 20. But then after that, it really started to fall off. And so there's some pretty big implications there when there's less inventory.

What is inventory? It's supply, right? When there's less supply and you still have the same number of people or more, if the population is growing, you have the same or greater demand, and that just drives prices higher. And it gets to the point where some people can't afford to buy a house.

And so what we've seen is we've seen that in rents, rents are very, very high compared to where they were in the past. They've grown a great deal. Now, what does all this mean? One is the wealth gap sort of grows, right, which is very unfortunate. Another thing, though, is that it drives inflation yet higher, which is really kind of arguably bad for everyone, right, and bad for the economy. And it causes the Fed to raise interest rates faster, which could lead to inflation. So all this data is really important, really useful.

There could be some trading opportunities in the REITs, but the implications as far as inflation goes are really relevant to any investing decision that you could be making. So I hope that helps.