The Broader Markets
Last Week – SPY was higher by 4.2% last week, double the 2.1% move options were pricing.
This Week – SPY options are pricing just a 1.6% move for the upcoming week, the smallest expected move since April.
Implied Volatility / VIX – The VIX closed the week near 21, down from 23 the prior week and down from 34 in early June.
Expected Moves for This Week (via Options AI)
- SPY 1.6% (+/- $7)
- QQQ 2.2% (+/- $7)
- IWM 2.1% (+/- $4)
- DIA 1.4% (+/- $4.50)
In the News
In early July when Tesla (TSLA) stock was trading around $680, we looked at how options were pricing the upcoming month that included an earnings event. Tesla is a stock that has tended to move alot more than options are pricing when it gets moving (both higher and lower) over the past year.
TSLA stock is trading near the same price of a year ago and is down about 45% from its all time highs above $1200. Options, which have underpriced moves in the stock (higher and lower) during its large swings of the past year are now pricing about a 15% move for the rest of July and about a 35% move by year end.
That 15% move by end of July was pricing a bullish consensus of about $780 in the stock. With this move higher Tesla actually ended July at $890, +$110 above what options were pricing at the time.
After the move higher Tesla options are pricing about 10% for August, which would put the stock near $800 or $1000:
Last week we discussed Credit Put Spreads. This week we’ll look at another use case of a Credit Put Spread, where it is used in lieu of a cash-secured Short Put
Credit Put Spreads as a Cash Secured Put Alternative when acquiring Stock
Often, Credit Put Spreads can be overlooked as a viable alternative to Naked Puts even when a trader’s goal is to potentially acquire stock at a price below where it is currently trading. Since the goal here is to reduce cost basis, the trader is looking to maximize the amount of premium received and may view the lower premium received from a Credit Call Spread as unattractive.
However, the difference in net premium received (between a Naked Put and Credit Put Spread) may be negligible if the short Strikes of each are the same and the long strike of the Credit Put Spread is far out-the-money.
For example, let’s assume that instead of the 97/95 Credit Put Spread in a $100 stock, we look at the 97/80 Credit Put Spread, using a long strike some 20% below where the stock is currently trading. And, let’s assume that we can buy this 80 strike Put for $0.10 vs selling the $97 put at $1.00. The net premium that we collect is now $90 rather than $100 and if we end up being assigned on our short Put, our resulting cost basis in the underlying stock will be $9,590 rather than $9,600, not too different.
In return for a relatively small difference in net premium (and resulting cost basis), we do see a couple of advantages. Firstly, our margin requirement is reduced from just less than $9,700 (on a cash-secured short 97 put) to just less than $1,700 on the -97/+80 (the width of the spread), meaning we improve potential returns on capital. Secondly, should the underlying stock price unexpectedly collapse, changing our appetite to own the stock at $97, we now have defined risk and the ability to limit our losses below $80.
Links below go to the Options AI calendar where you can see the other companies each day and click through to see charts (free to use). Recent earnings moves (actual) start with the most recent:
- Advanced Micro AMD / Expected Move: 6.6% / Recent moves: +9%, +5%, -1%
- Paypal PYPL / Expected Move: 9.1% / Recent moves: +11%, -25%, -10%
- Starbucks SBUX / Expected Move: 4.8% / Recent moves: +10%, -1%, -6%
- Uber UBER / Expected Move: 10% / Recent moves: -5%, -6%, +4%
- Occidental OXY / Expected Move: 5.6% / Recent moves: +1%, 0%, -1%
- Moderna MRNA / Expected Move: 7.3% / Recent moves: +6%, +15%, -18%
- Mercado Libre MELI / Expected Move: 8.1% / Recent moves: +2%, +4%, +5%
- Lucid LCID / Expected Move: 10.7% / Recent moves: -4%, -14%, +24%
- Robinhood HOOD / Expected Move: 10.5% / Recent moves: -3%, +10%, -10%
- Alibaba BABA / Expected Move: 8.4% / Recent moves: +15%, -1%, -11%
- AMC AMC / Expected Move: 10.2% / Recent moves: -5%, +1%, -11%
- Block SQ / Expected Move: 10.6% / Recent moves: +1%, +26%, -4%
- DraftKings DKNG / Expected Move: 10% / Recent moves: -9%, -22%, -2%
Option trading without the legwork: get started with an Options AI platform subscription today!
Based upon publicly available information derived from option prices at the time of publishing. Intended for informational and educational purposes only and is not any form of recommendation of a particular security, strategy or to open a brokerage account. Options price data and past performance data should not be construed as being indicative of future results and do not guarantee future results or returns. Options involve risk, including exposing investors to potentially significant losses and are therefore not suitable for all investors. Option spreads involve additional risks that should be fully understood prior to investing. Securities trading is offered through Options AI Financial, LLC, member FINRA and SIPC.