January 26th, 2022

No Regrets Being Bearish

Markets continued choppy behavior, selling off strong in the morning, only to rebound and finish mixed by the end of the day.  Investors shrugged off Microsoft’s (MSFT) warning of a slowdown in sales.  The market didn’t like it at first, but Microsoft came roaring back throughout the day.

It makes me wonder – how many companies need to report on a slowdown in sales for investors to take notice? Or do all other investors know something I don’t?

That brings me to a question I was recently asked…

Someone asked me if I regret being bearish on the market and if I’ve been able to turn a profit with the market going up as it has.

While I have a theory about what the market will do, that doesn’t preclude me from placing other trades at the same time. I think the market should be bearish right now, but I still like companies like UNM, NFLX, and AMD for various reasons. I wrote about each of them in previous articles this year.

On 1/13/23 I wrote about a cash-secured put option on UNM for the 17 FEB $37.50 put. That position is up 50%.

On 1/17/23 I wrote about NFLX using either the 17 MAR $330 calls, the 17 MAR $330/365 debit spread, or the 17 MAR $305/300 put spread. Those are up 58%, 60%, and 71% respectively.

On 1/20/23 I suggested an AMD 17 FEB 55/60 bull put spread – that’s up 70%.

I’m not here to brag about a track record. I certainly got some things wrong. I merely bring these examples up as a way of saying in your portfolio you can have a market view and still have some trades in the opposite direction. Spreading out your trades in each directional category can be a good way to hedge yourself too.

So no, I don’t regret being bearish on the market even though the market keeps going higher.

Speaking of which, here’s how the S&P 500 sectors performed over the last 5 days courtesy of barchart.

In Options Testing Lab’s live webinar earlier this week, I discussed that when volatility is low, you want to have positive vega option positions. Vega is the amount of change the option will experience with every 1% gain in volatility.

What increases volatility? News events like the Fed and earnings.

CVS (CVS) has earnings coming up on 2/8 and the stock has been pummeled over the last two months as it now sits at a support level established in October last year.I see a move higher from here, leading into earnings.

A calendar spread is a positive vega trade. Here’s an example of a calendar spread, using CVS.

Buy to open +1 17-FEB 88 call
Sell to open -1 3-FEB 88 call
Cost: 1.33 debit

I am skewing this to the bullish side instead of placing the calendar at the current stock price, with the assumption that CVS will bounce off the $85 support level and move slightly higher from here. This trade also gives me an opportunity to roll out to the 10-FEB expirations for additional credit to offset a potential loss.

If you have any questions, comments, or anything we can help with, reach us at any time.

Email: [email protected]

Phone: (866) 257-3008

Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing La