This post is a selection of insights from our reports to clients this week, showcasing how we build our contextual framework to find daily trade ideas. This is a repeatable process aimed at finding high-risk-reward trades. Note that the onus is on the subscriber to pick and choose which trades fit their overall risk. 

A Cautionary Stance Heading Into This Week

We started the week warning our subscribers that some chasing had been going on in the recent risk rally in stocks by individual investors. Remember, this is a bounce we had been calling for the previous week.

FOMO buying is often dangerous, and retail is known for being late to the party. Besides, we outlined that the seasonally weak period in late Sep/early Oct was drawing closer, and those who have participated in recent market strength may do well to lighten up into mid-Sep.

Keeping these observations top of mind and judging by the suppressed levels of the VIX, which had retested its yearly low at 13.00, we felt compelled to capitalize on an opportunity in the 3-month VIX contract, which looked cheapest relative to recent history. We concluded that the curve was not as steep as it usually would be when vol is so low.

The fact that this 3-month timeframe also captures the seasonal uptick in volatility we often see in Sep/Oct only reinforced the directionally bullish trade. This VIX trade idea note was sent to our subs on Sept 5th and can be found below. Since then, the VIX front-month contract has spiked as high as 15.50, which has also led to a steeper curve 3 months out, getting us off to a solid start.

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Not A Bad Time To Put On The Bullish Hat On The Yen

Our next trade on the USD/JPY was a testament to our global approach. As macro option traders, we don’t marry to one particular market.

Here is what we noticed: The relationship between USDJPY and US yields had been very strong for over a year as BoJ held firm on YCC and US yields kept marching higher, making dollars far more attractive than Yen. However, lately, we saw yields pullback slightly from their highs, but USDJPY has continued to march higher into a supply zone from late last year.

Approaching the 150 level, we again picked up on the renewed jawboning from Japanese officials. So far, the BoJ policy tweak has not led to much upside in Japanese 10Y yields, which are at 0.65%, and we think that if they let yields slide higher, then JPY has room to strengthen.

Therefore, we think USDJPY is running out of upside, and looking for ways to get short seems sensible. Remember, when we form these initial opinions, we always default back to our trusty volatility dashboard, which you can check below.

By the way, we recorded a video in early August where I showed viewers exactly how this process works, and what goes on behind the scenes.

Back to the USD/JPY short trade. Looking at our USDJPY dashboard above, we see buying puts as screening well with lower vols and skew. However, FX rates are notorious for moving slowly, and we are aware that the next BoJ meeting may be too early for a major move.

So, we wanted to find ways to be short, which also carries well if nothing happens in the next few weeks. With skew cheaper, bearish risk reversals made sense, but taking an open-ended risk if US yields spike didn’t sit well with us. So, we thought selling call spreads to finance puts on USDJPY was a safer way to be short into year-end. To express this idea, we used the $FXY product, which is the inverse of USDJPY.

This USDJPY trade idea was sent to our subs on Sept 6th and can be found below. Since then, the USDJPY has retraced in favour of our position moderately, about 50 pips. Remember, this position enjoys plenty of time for BoJ to see higher inflation prints and ease up on JGB buying to allow yields to creep higher. It also gives time for US economic data to roll over and trigger more downside in US yields.

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Shorter Vol In The Healthcare Sector

As we moved into the later part of the week, our focus shifted to specific stock sectors. In this case, $XLV, or healthcare. Since the turn of the month, defensive sectors have been under the most pressure, and cyclicals continue to do better, especially energy.

The healthcare sector (XLV) has traded back to the bottom Bollinger band, and whilst major support comes in a bit lower near 128, we saw scope for a bounce if broader markets had hold into next Friday’s options expiry. So, the next step was to check the vol dashboard for $XLV.

Our strategy compass on XLV, as one can observe above, clearly showed buy calls as the optimal approach. However, this is just an assisting tool that requires the human overlay to form a final opinion discretionarily.

We thought that since we are more cautious about the broader market and also think that even in a bounce, the sector will meet a good deal of resistance at August highs, so we opted to lean shorter vol as short-dated implied vol has room to fall even from these low levels.

The leverage, which we are always after, we felt was found via call ladder structures. Any strength into mid-late September is likely to be a grind higher in our view, and so this will be a nice way to participate without spending much premium.

This $XLV trade idea was sent to our subs on Sept 7th and can be found below.

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I wanted to conclude by reminding you that all of these positions we share with our subs are then tracked via our options portfolio. I go through all these trades and the risk management via a 20-30m weekly webcast that gives in-depth guidance.

You get to learn how to break down options trades by their Greeks and restructure trades in an optimal way to meet desired investment goals in real-time. This weekly broadcast is part of our Macro Options Overlay. Find below a taste of it via how we risk-managed carry trades.

And that’s a wrap for this week!

Remember, you now have a chance to build your knowledge base via our FREE Options Insight webinar!

You will learn the process and tools I follow, from thesis to trade idea and actual execution.

This is a unique chance to learn how to master simple options trading strategies straight from a 20+ year career.

Just click the link below!

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Thank you for making it this far!

As always, if you have any questions, comments, and/or found this helpful, feel free to reach out and let us know at info@options-insight.com


Imran Lakha
Options Insight

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