Last week's trade was a bet that current market trends would continue to be downward trending. However, on Monday and Tuesday, the S&P 500 shot up 5%! This is an incredible jump that saw our investment hit the -15% mark. This meant that the put options we sold were in the money. However, due to better than expected unemployment numbers, the market proceeded to crash 4.06% from its Tuesday high. You might be wondering, why did better than expected unemployment numbers lead to a market down-turn? I will be writing an article later this week about this which can be found under the FAQ. As was stated in the last article, recessions are usually inversely correlated with unemployment. So, while we made money last week betting that the market would continue to show signs of a recession, lets continue to keep in mind and help those who will be negatively impacted by the current and upcoming economic down-turn.
Anyway, so far we have made $100 over two weeks of trading or 1% on our $10,000 (paper-money) account! This is incredible progress towards our goal of doubling our initial investment within the next 18 months. I was personally shocked by the 2-day bull rally last week, so this week I decided to play a more conservative strategy by selling a stock with, by some calculations, a negative Beta value. Essentially, Beta is the Greek associated with how a stock has been historically correlated with the overall market. A positive beta value means that the stock is positively correlated with the market. Likewise, a negative beta value means that the stock is negatively correlated with the market. The magnitude of the number indicates the strength of the correlation. For example, a stock with -.38 will be expected to decrease in value by .38% if the market goes up by 1%. As it so happens the stock we are going to sell puts on this week, Zoom (ZM), has a Beta value of -.38%. I used a similar filter to the filter I used for the first week, but changed the volatility filter to a Beta filter.
In particular, I decided to filter out for stocks that have a negative Beta value as I still predict the market will be on a negative trend. If the market goes down a negative percentage, then a stock with a negative Beta will increase positively. However, I didn't want a stock with too large of a Beta value because the market has been particularly irrational recently. With this in mind, my range for Beta was [-1,0]. I found the Beta for Zoom on Yahoo Finance. The Beta value is highlighted in the screenshot of Zoom's profile below.
Zoom is an interesting stock. A large catalyst for Zoom's recent growth is due to COVID. Almost overnight, seemingly every school began using Zoom as a platform for teaching online courses. This lead to a bull run for the stock. Knowing this about ZM, and that tech stocks this past year have not been performing well, I wanted to look at Zoom's stock history to gauge recent and historical price movement.
As you can see the last time Zoom was below $70 a share was in November of 2019. With this in mind, I felt that selling puts for any price under $70 would be relatively safe, but to confirm my intuition, I needed to look at the actual option chain. For this, I turned over to ThinkorSwim by TD Ameritrade.
The options market confirms my intuition as options at the $70 strike have a delta of -.15 and a probability of being in the money (finishing the week less than the strike) of 18.46%. However, this risk level is a bit too much for me, especially after what happened with SPXU last week , so I decided to go with the $68 strike. This strike has a Delta of -.09 and a probability of ending the week in the money of 12.39%. Both of these metrics point to this strike being much less risky for me and a premium of $34 ($33.34 after fees) is respectable.
Make sure to come back next week or join our email list to see how this trade turns out. I hope you enjoyed this analysis and I will see you here next week! Happy trading!
-Vlad
*This is not financial advice. Every investor should invest in companies and utilize strategies that maximize their financial goals within their personal risk tolerance. Trading options is a risky investment strategy.*
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