Note: Summary notes of the meeting are below the video in this article.
Details:
Role of Volatility in Option Prices: Stephen Cox began the market discussion by emphasizing the importance of volatility, specifically the VIX (implied volatility), in determining option prices. They reiterated the strategy adage, "when the VIX is high, it's time to buy. When the VIX is low, it's time to go," treating the VIX as a contrarian indicator (00:07:52).
VIX and Option Selling Strategy: When the VIX spikes, option premiums become very pricey, which is beneficial for sellers using a put option strategy (00:08:53). They explained that a recent VIX spike resulted in a temporary loss for their trade, but they accounted for a large "wiggle room" for the strategy to go wrong (00:10:11).
Impact of Time Decay and Volatility Drop on Profit: Stephen Cox noted that despite the S&P 500 share price being lower than when they entered the trade, they were still in profit. This profit resulted from time decay making the options cheaper and a drop in implied volatility, which also lowered the option prices (00:12:13).
Market Outlook and S\&P 500 Trend: Stephen Cox stated that the current situation, with crude oil remaining stubbornly high due to the ongoing conflict, makes a meaningful rally in the S\&P 500 difficult (00:13:12). Patrick mckeon's assessment that the S\&P 500 is starting to turn over was acknowledged, with the market being in a long-term uptrend but a short-term downtrend (00:14:10).
Strategic Management of the US 500 Trade: Regarding the US 500, Stephen Cox currently intends to let the trade run until the premium drops to 8. However, if the market rallies and the premium drops to 15 or 16 by tomorrow afternoon, they might exit the trade early to lock in gains before the weekend due to current volatility and uncertainty (00:16:07).
Strategic Management of the XSP Trade: For the XSP trade, the limit order is set at 75 or 08, but if the premium drops to 140 or 150 by midday tomorrow, they might close the trade early (00:17:05). This strategy of locking in a decent profit tomorrow is due to exceptional times involving a war, rallying oil prices, and issues in the credit markets (00:18:08).
Discussion on Short-Term Puts and Strategy Consistency: Michael Carroll asked if it would be advisable to use shorter-term weekly puts due to volatility, but Stephen Cox advised sticking to the current strategy (00:19:02). They reaffirmed that the current time frame is already reduced to about 30 days or less, rather than the normal 45 days (00:19:59).
Advice on a Put Spread and Break-Even: Following Michael Carroll's query about their 670/660 ratio put spread, Stephen Cox advised rolling out and down one of the 660 contracts (00:19:59). This advice was based on the projected opening of the market and the risk that a 2% drop would place the price below the 660 strike, making it difficult to roll out and down later (00:20:59).
Outlook on Gold and Silver: Stephen Cox noted that gold is likely to mark time because the US dollar is strengthening as a safe haven. They would not trade gold, preferring to own it, but suggested that silver is a different ballgame and should be traded rather than invested due to its exponential moves (00:21:50).
Stock Buying Opportunities and Oil Conflict: The current stock market decline is creating buying opportunities, assuming the US economy remains healthy and the conflict is short-lived. If the conflict is short-lived, the market is expected to rally until the end of the year (00:22:52).
Specific Equity Recommendations (Software and AI): Stephen Cox reiterated previous stock recommendations, including Oracle, as its downtrend appears over and demand for its AI side is strong, and Nvidia as a value buy. CRM was also mentioned as a stock where fears are likely overblown (00:23:58).
Airlines and Fuel-Intensive Business Analysis: Michael Carroll's idea of buying Alaska Airlines was discussed, noting that high oil prices negatively impact airlines as fuel is a major cost (00:23:58). If the conflict is short-lived and oil prices drop, airline stocks could see a massive rebound, and other fuel-intensive transportation stocks like FedEx and DHL are also worth considering (00:25:02).
Geopolitical Discussion on the Conflict Duration: The group discussed the likely duration of the conflict, with Stephen Cox asserting that it makes no economic sense for anyone for it to continue for long, anticipating that peace will prevail (00:27:22). Michael Carroll mentioned the substantial cost of the war to the US (around $10 billion), adding that the US cannot maintain that cost (00:28:29).
Perspectives on Geopolitical Intervention and Market Impact: Nanik Hotwani suggested that China might pressure Iran to back off due to China's own economic pain and their relationship with Iran (00:29:34). Stephen Gavin provided an insight from the hospitality sector in Dubai, where many people have been furloughed until September 1st, suggesting they anticipate a slow period (00:30:31).
S\&P 500 Downside Risk and Support Levels: Stephen Cox prepared the group for a potential 10% peak-to-trough drop in the S\&P 500, down to 6,300, depending on the conflict's duration (00:32:31). They identified the next clear line of support at about 6,600, which is the 200-day moving average (00:15:11).
Risk Management and Strategy Comfort: Stephen Cox demonstrated the strength of their XSP strategy, showing that even if forced to roll out and down (at 6,300), they could push the strike down to 560 for the end of April (00:32:31). This deep contingency plan offers comfort that they should be fine even if the market goes "pear-shaped" (00:34:42).
Refined Airline Stock Recommendations: Based on the geopolitical discussion, Stephen Cox suggested that domestically oriented airlines like Alaska Airlines, Ryanair, and Southwest Airlines might be a better choice. This is because the appetite for flying through the Middle East might be low over the next while, impacting international carriers' revenue (00:35:47).
US Bond Yields and TLT Put Option Trade: US bond yields are spiraling out, indicating the market is pricing in that the Federal Reserve is unlikely to cut rates due to oil's inflationary pressures (00:36:49). Stephen Cox mentioned that selling a short put option on TLT (the 20-Year Treasury Bond ETF) is back on the cards for their IBKR account (00:37:48).
TLT Trade Pricing and Strike Selection: Michael Carroll provided the current price for the TLT 86 put option (April 17th expiry) as 111, representing a 1.3% return (00:37:48). Stephen Cox suggested choosing the 85 strike instead to account for the possibility of yields creeping up to 4.5% due to oil price inflation (00:38:55).
Question on XSP Premium and Profit Taking: Nanik Hotwani asked if they should close the XSP trade if they reach 65% to 70% of the premium today. Stephen Cox confirmed that if they can buy back the premium at 140 or 150 today or tomorrow, they should absolutely take it off the table (00:39:59).
Opinion on Oil (UNG) Trading Strategy: Stephen Cox is personally trading oil via bear put spreads but will not broadcast it as a trade due to its low probability and defined risk. A bear put spread on USO, for example, buying the $100 put and selling the $90 put, is a way to bet on the conflict being short-lived, though it has less than a 30% chance of winning (00:40:52) (00:42:44).
Forex Trading on IBKR vs. IG: Nanik Hotwani asked about trading Forex on IBKR. Stephen Cox explained that it can be done through currency CFDs on IBKR, requiring account approval and configuration (00:43:41).
Alternative Currency Strategy (Cash Conversion): An alternative to trading currency pairs is converting cash to another currency if one feels the original currency will weaken. For instance, converting US dollars to euros if the dollar is expected to weaken, and then converting back when it has weakened, is a simple cash management strategy (00:45:46).
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