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Seasonally Bearish The Week After September Expiration (Preview)

By Lawrence G. McMillan

The week after September expiration (i.e., the week after the third Friday of September) is historically a very negative week for the market. In fact, last year, that week saw a 180 point decline in $SPX, the largest point decline that we have seen in the 33 years that we have been using this indicator. It was not the largest percentage drop in a week for this system (that occurred in 2011).

Interest Rates Are Having An Affect On Derivatives (Preview)

By Lawrence G. McMillan

It turns out that the increase in interest rates has gone on long enough and raised rates enough that some things regarding derivatives are occurring that haven’t been in place in quite some time – or ever, for that matter. We are going to address a couple of related topics. Newer option traders might not have seen some of these things before, since essentially interest rates have been at or near zero since 2009, until last year.

The Most Unusual $VIX “Spike Peak” Buy Signal Ever? (Preview)

By Lawrence G. McMillan

The CBOE’s Volatility Index ($VIX) gets a lot of attention from both technical analysts and the media. That was the case this week, as $VIX spiked higher – rising to 25.84 intraday on December 13th, before reversing sharply downward after the CPI number was released. It closed that day at 22.55, more than 3.00 points below its high, and that generated a $VIX “spike peak” buy signal, by our definition.

2022 Post-Thanksgiving Seasonal System

By Lawrence G. McMillan

There are actually three different positive (bullish) seasonal systems that occur between Thanksgiving and the start of the new year. In short, they are 1) the post-Thanksgiving rally, 2) the “January effect,” and 3) the “Santa Claus rally.” These encompass the entire period between the close of trading on the day before Thanksgiving through the second trading day of the new year. Moreover, small caps stocks (as measured by the Russell 2000 Index [$RUT, IWM]) normally outperform large-cap stocks over that time frame. We will describe the system below, but if you want more background, you might refer to the November 14, 2014, issue of TOS (Volume 23, No. 21), although there are other articles scattered over the years that discuss this system.

Using T-Bills To Collateralize Option Transactions (Preview)

By Lawrence G. McMillan

This is a topic that has been so long-forgotten that it seemed like it might make a good article now, or at least provide a “refresher” for those who might remember it. Now that interest rates are actually high enough to “matter,” traders who need to put up collateral margin can benefit from the old technique of buying T-Bills with the cash in their account. If the T-Bills mature within 6 months, the trader can use up to 99% of the value of the T-Bills for collateral margin purposes, while earning the T-Bill rate on their cash. The 90-day T-Bill rate right now is about 3.75% (annual), which is more than any brokerage firm is paying you on your cash balances. The best rate at a brokerage firm is probably Interactive Brokers (IB) which is paying 2.58% on the cash balance in excess of $10,000 in your account.

The “Ultimate” Tail Trade? (Preview)

By Lawrence G. McMillan

Yesterday (October 6th), on the CBOE, someone bought 50,000 $VIX Mar (22nd of 2023) 150 calls for 0.19. So, that’s 50,000 contracts. Strike is 150 for $VIX (or technically, for the March (2023) $VIX futures. And the expiration date is roughly six months from now.

Remembrances Of The 1973-1974 Bear Market (Preview)

By Lawrence G. McMillan

At the beginning of 1973, the Dow (no one paid much attention to $SPX back then) made a new all-time high, trading up to 1067.  The Barron’s Roundtable, a survey of top money managers and brokerage firm analysts, was published at the beginning of 1973 under the (now infamous) headline, “Not A Bear Among Them.”  They were all bullish.  President Nixon declared that the Vietnam War was over (although it didn’t wind down completely until 1975).  However, stocks had a mind of their own (then, and now), and the Dow began to immediately decline. 

Hard To Borrow Stocks (Preview)

By Lawrence G. McMillan

In the past, we have occasionally talked about hard to borrow stocks, and how that affects option prices.  When market makers and others cannot borrow stock, then the “normal” option arbitrage relation falls apart.  Normally, the following equation holds true (modulo dividends and carrying charges):

Stock price = Strike Price + Call Price – Put Price (where put and call have the same terms)

2021 October Seasonal (Preview)

By Lawrence G. McMillan

We did not trade the October Seasonal this year, but I wanted to bring you up to date on the statistics for the trade now that the seasonal period has ended (it began with the close of trading on October 27th and ended with the close of November 2nd). This year, that was an $SPX gain of 108.88 points – the second largest point gain the 43-year history of the system. Percentage-wise, it was 2.4%, and that has been bested many times. Still, it was not a good trade to miss...

Expensive Option Strategies (Preview)

By Lawrence G. McMillan

Normally, we have “Naked Put Writes” in this section of the newsletter. But with the explosion in implied volatility and stock price in several “short squeeze” stocks (or “meme stocks,” if you prefer: a meme stock is any publicly traded company that is benefitting from the fact that investors are using social media to drive interest in the company's shares).

The following table shows the current status of the most expensive of these in terms of implied volatility:

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