Tag: noah kiedrowski

Options Trading And Implied Volatility (IV) Rank

Posted on by Noah Kiedrowski

Recent Market Correction and Options

The post-pandemic gains have been negated as the accommodative monetary policies are coming to an end. The market has been smacked in the face with several macroeconomic issues via unsustainable inflation, impending interest rate hikes, and geopolitical issues. As such, a third of the Nasdaq 100 stocks are off at least 30% from their highs, half of the S&P 500 has fallen 15% or more, while the median biotech stock has sold off by 60%. Leveraging the Ark Innovation ETF (ARKK) as a proxy for the high-flying growth stocks, this composite is down 60% as well.

This multi-month period of sustained weakness has been accompanied by extreme volatility. With the increase in overall market volatility, implied volatility (IV) and IV Rank become advantageous for option traders as rich premiums can be collected when selling options. This type of extremely volatile environment that we've been faced with recently reinforces why risk-defined options (i.e., put spreads, call spreads, and iron condors) are critical if one chooses to leverage options as a component of an overall portfolio strategy. Risk-defined option trades establish your max losses and allow one to leverage a minimal amount of capital while maximizing returns.

Options and Implied Volatility

The goal of options trading is to sell options and collect premium income in a consistent and high-probability manner. Enabling your portfolio to appreciate steadily month after month without guessing which direction the market will move. The main key for options trading success is leveraging implied volatility and time premium decay to your advantage. Since options premium pricing is largely determined by implied volatility, it's this implied volatility component, when used appropriately, that provides option traders with a statistical edge in trading over the long term (Figure 1). Continue reading "Options Trading And Implied Volatility (IV) Rank" →

Post-Pandemic Gains Negated - Don't Be Remiss

Posted on by Noah Kiedrowski

Relentless Selling

For many individual stocks, the post-pandemic gains have not only been negated, but share prices are now lower than pre-pandemic highs. The accommodative monetary policies, Covid related stimulus, asset purchases, and market liquidity are coming to an end. Now, raging inflation, impending interest rate hikes, Federal Reserve tapering, omicron ebb and flow, continued supply chain disruptions, and geopolitical issues have culminated into the current market swoon. The latest market weakness has been persistent over the past few months while being exacerbated in January and February to start 2022. A third of the Nasdaq 100 stocks are off at least 30% from their highs; half of the S&P 500 has fallen 15% or more while the median biotech stock has sold off by 60%. Taking a look at a composite of high-flying growth stocks using the Ark Innovation ETF (ARKK) as a proxy, this cohort is down 60% as well.

The recent multi-month sell-off from November 2021 through mid-February was met with heavy and vicious selling. Valuations have been decimated overall, and cold water has been thrown on investor enthusiasm, especially in the more speculative stocks in cloud software, SPACs, and recent IPOs. The tremendous selling volume has inflicted damage across the board, with whole swaths of the market auto-correlating into a downward spiral. Now many opportunities are presenting themselves as valuations have been greatly reduced. Being too bearish may prove ill-advised over the long term as we're witnessing the 2020 Covid-induced sell-off unfold all over once again. Portfolio balance is key in any environment and deploying the cash portion of one's portfolio during periods of moderating valuations is exactly where this cash can be advantageous. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies during periods of indiscriminate and heavy selling. Continue reading "Post-Pandemic Gains Negated - Don't Be Remiss" →

Downside Protection: Risk-Defined Put Spreads vs Cash Covered Puts

Posted on by Noah Kiedrowski

Option trading can provide a meaningful addition to one's overall portfolio strategy when used in a disciplined manner. When options are used as a component to a holistic portfolio approach, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is achievable. An options-based portfolio can provide durability and resiliency to drive portfolio results with substantially less risk via a combination of options, long equity, and cash. When engaging in options trading, specific rules must be followed. One of the most important rules is to structure every option trade in a risk-defined (put spreads, call spreads, iron condors, diagonal spreads, etc.) manner.

The January 2022 meltdown in the overall markets is a harsh reminder of the trade-offs between risk-defined options and options that have undefined risk. The overall markets were in freefall, with a large percentage of stocks getting cut in half with indiscriminate selling across all sectors. The extreme market conditions throughout January resulted in all stocks auto-correlating in a downward spiral. During these periods of unrelentless selling across the markets, risk-defined options are essential to protect one's portfolio from massive losses while preserving cash-on-hand within the portfolio.

Put Spreads vs Cash Covered Puts

Risk-defined option spreads (i.e., put spreads) prevent any losses beyond a specific strike price, avoids the assignment of shares, does not require a significant amount of capital, and does not soak up capital with share assignments. Conversely, in the case of cash-covered options (i.e., cash-covered puts), large amounts of capital are dedicated to the trade, and share Continue reading "Downside Protection: Risk-Defined Put Spreads vs Cash Covered Puts" →

Opportunities Abound - Building Out A Portfolio

Posted on by Noah Kiedrowski

The economy is going through a pivotal moment as the Federal Reserve withdrawals stimulus as economic tailwinds may be in jeopardy. The culmination of inflation, supply chain constraints, pandemic backdrop, rising rates, and easy money policies coming to an end has led to some individual stocks losing 30%-80% of their value in a matter of weeks. All the major indices have sold off in a meaningful way and are now in correction territory. Initially, there was a massive sea change in the market out of technology, specifically high beta/richly valued stocks and into value. As a result, the Nasdaq dropped over 15%, Russell 2000 dropped over 20%, S&P 500 dropped over 10%, and the Dow Jones dipped down over 8%.

With many high-quality companies selling at deep discounts, this correction offers an opportunity to build out a portfolio and engage in dollar-cost averaging. It's difficult, if not at all impossible, to time the market and buy at the exact bottom. However, one can initiate a position and add to the position as the stock becomes cheaper when and if the market-wide sell-off deepens. Any portfolio strategy should include a cash portion, and it's times like these where the cash portion should be deployed and put to work.

Earnings Disasters And Indiscriminate Selling

Disappointing earnings have been a linchpin for individual stocks to lose swaths of value while sending entire sectors into a downward spiral. The financials suffered massive selling pressure after JP Morgan (JPM) and Goldman Sachs (GS) reported earnings. Netflix (NFLX) saw its stock tank over 25% after reporting earnings, and this reverberated through the streaming space to sink Disney (DIS) too. Continue reading "Opportunities Abound - Building Out A Portfolio" →

Extreme Volatility: Options-Based Portfolio Approach

Posted on by Noah Kiedrowski

Cash is a critical component to any portfolio strategy to reduce volatility, seize opportunities, lower cost basis of a long position and avoid full exposure to the equity markets. Controlling portfolio volatility is essential as the broader markets continue to undergo a sea change from high beta/richly valued technology stocks and into value names. The past four-month stretch from September 2021 - January 2022 serves as a prime example of extreme market volatility. The markets pushed to new all-time highs early in September 2021, then suffered a significant selloff in the same month where the Dow Jones was down as much as 6%. October 2021 saw a bounce back into positive territory with new all-time highs set. Then the November/December 2021 stretch saw a sharp dichotomy between the tech-heavy Nasdaq and the Dow Jones, with these indices experiencing relentless selling and heavy buying, respectively.

Amid the bifurcated market, entire sectors have been decimated, and some companies have lost swaths of market capitalizations. Even many well-established, profitable large-cap companies have seen their market capitalizations reduced in a meaningful way. Entire sectors of the market have been wiped out, specifically the fintech space and some pure stay-at-home plays. Given the market backdrop, the cash portion of the portfolio can come in handy to seize unique opportunities to bolster a portfolio. In addition to cash, a conservative options strategy can offer additional mitigation against these pockets of extreme volatility.

A Holistic Approach

Proper portfolio construction and optimal risk management is essential when engaging in options trading to drive portfolio results (Figure 1). Managing a long-term successful options-based portfolio requires a risk tolerance balance between cash, long equity, and options. Ideally, an options-based portfolio should be broken out into the below structure (This is an example breakdown, and percentages can be modified): Continue reading "Extreme Volatility: Options-Based Portfolio Approach" →