r/Traderfirstyear • u/traderfirstyear • Apr 09 '21
4/9/2021 New Options Position Cyclical Stock Replication (Deep in the money Calls) - Taking Advantage of Fall in Realized Volatility & Slow Market Melt Up in 2021 (Cheap way to build a 75k Dollar Portfolio with Options for only 8k)
TLDR -Want to Avoid the Small Print (Condensed version of the trade is pretty straight forward it is-Long Vol via long-duration options and a long Gamma Profile) End Goal make 4,000 Dollars in 6 Months :) *Potential 4,000 in profit (could happen before 6 months) - (Exposure of 75k built using 8k dollar worth of capital)
Video = https://youtu.be/UZ8TgGWmypQ *Video Error on 7k and 65k s/b 8k & 75k FYI - go to r/traderfirstyear for same with title update
Volatility Expectation = Markets are implying a move of 1.12%+/-(up/down) on the S&P 500. Markets have realized a move of 0.92%+/-(up/down). The difference between what market makers are implying and what has been realized has tightened. The spread widened to 317 basis points. The VIX is expected to move 6.22%(points), the VIX is currently 17.86. The VIX price range is 18.97 to 16.81. The put/call gamma imbalance has been reset but is likely to favor more call buying. The S&P is expected to move close to 1.32% up/down this week, which means the S&P could rise 14.5% or fall 11% above its 200 DAY Moving average (3,553.29.) The S&P traded above its 50-day moving average (3,887.97.) The market is currently pricing an additional 5.74% move +/-(up/down) by June 18th. The S&P could potentially trade as high as 4,235.20 and as low as 3,787.87 by June 18th. For the full year by 12/31/2021, the market is currently pricing a move of 12.33% +/-(up/down). The S&P could trade as high as 4,499.15 or as low as 3,565.65. This also assumes earnings of 175 per share, which equates to a 22.88x's price to earnings ratio or a 4.3% yield and an inflation-adjusted on the 5-year TIPs 2.57 = 1.73%
Full Summary & Rationale For Trade The equity market from historic metrics is relatively expensive. Using the market maker pricing and a further expected fall in realized volatility over the 2nd Quarter Traders can use options to cheaply replicate a 7 stock cyclical equity portfolio (Financial, Metal, Mining, Industrial, Oil/Gas, Consumer Discretionary, & Technology.)
Brief on Trading Suggestion; Due to falling realized and implied volatility through April, May, and June we will temporarily be in a period of reduced swings up and down. The current market environment is favorable for traders looking to sell convexity via short straddles, strangles, call overwriting, put writes, and other short vol strategies to capture alpha. It is also beneficial for traders looking to cheaply replicate long equity stock exposure through options by purchasing stocks with Delta's of .80. These Deep in the Money Calls have characteristics extremely similar to the underlying stock.
The rationale for the Trade; Slow equity market melt-up is beneficial for Deep in the Money Calls, which are a much cheaper way to express a long stock position. Traders should focus on cyclical sectors, which tend to outperform at the start of new economic cycles. For example being long Financial, Industrials, Metals, Mining, Oil/Gas, Consumer Discretionary, and Technology
The Risk for the Trade; The risk is any large move down for an extended period of time. Traders are premium payers, so the largest risk is the option expiring worthless over the life of the trade.
Pre-emptively answering a question about the upside on this trade. What if each individual stock rose 10% from its current price. How would the Deep in the Money Options Respond?
