Jeff Bishop’s Total Alpha Trading Strategy | The Jump on the Week

I can’t recall another time where I’ve witnessed a stock market rally to all-time highs—with such unease, disgust, and hatred.

And you know what else?

There is an incredible disconnect with the market’s performance and what the raw data is saying…

And let’s not forget about all the uncertainty:domestic political tensions as the 2020 election heats up, Brexit uncertainty, cracks in overnight lending, and a contraction in the Chinese economy.

However, here we are, at all-time highs—and a record number of net shorts in the VIX futures.

I see a massive screw factor here driven by Wall-Street money. How else do you explain such passive behavior in volatility against a weekly SPYchart as this:

SPY weekly chart

Traders use Bollinger Bands to gauge volatility, when a stock or ETF experiences extreme volatility, it will trade above or below the Bollinger Band.

You’ll have to go back to the beginning of 2018, to find the last time a stock indice closed over the weekly Bollinger Bands, and not since 2016 has the SPY moved from near the lower band to the upper band (a two standard deviation move) in a quarter.

It feels like…

Big money wants to hide their true intentions with some good ol’ fashion market manipulation.

Heck, they play in their own dark pool exchanges to cover their tracks…moves that Taylor Conway exploits in Shadow Trader.

Before I get sidetracked and go full-on Alex Jones on you, let me regroup, and get back to what really matters—and that’s providing you with the tools, education, and tips to becoming an elite trader.

In this issue of the Jump, I breakdown charts in XLE and XOP, go over market-moving events (economic and corporate), as well as, give you my thoughts on volatility.


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A tweet, a meet, and a Thanksgiving treat

The global public cannot escape the never-ending barrage of political coverage that dominates headlines like never before. It takes a Ph.D. in forensics to sift through rotting stories to find a kernel of valuable information.

Trump and Xi continue their dalliance like some sort of teenage courtship. Will they meet, or won’t they? Does December bring more tariffs? Who kisses who on the cheek first?

It’s a sleight of hand that obscures any real certainty. At one point markets needed absolute clarity to pick a direction. Now, they simply need assurance of freely flowing Fed policy.

Short of any new tweet or revelation, the markets face little in their march towards turkey day. Instead, the focus shifts on how far retailers are willing to encroach into the meal and NFL football. Make no mistake, Black Friday through Cyber Monday will drive the conversation through year’s end.

In fact, November tends to be one of the best months for the SPY. Over the last 20 years it turns a profitable month nearly ¾ of the time!

But back up to the Alibaba contrived ‘Singles’ day. Marked by four 1s on the calendar, the Chinese  Valentine’s Day should signal the arrival of a horseman of the apocalypse. Instead, it proffers a critical measure of spending.

We don’t know the extent of the economic slowdown in China. Single’s day not only tells us about the Chinese economy but any fallout from turmoil in Hong Kong.

Will the energy rally fizzle?

The standout the last few weeks happens to come from the economic laggards. Energy stocks once left for dead, rose from the grave bidden by a cold winter.

XLE weekly chart

The recent run in Oil and Natural Gas gentrified the once dilapidated sector. Exploration companies hadn’t seen bids in so long I expect they looked like apparitions.

XOP weekly chart

A cold winter itself wouldn’t create sustained investment. But, a theme that’s seeded itself in the underbelly of the trading community might yet blossom.

The shale boom in the U.S. brought a flood of production and investment, not seen the Beverly Hillbillies struck oil. Easy money from banks greased the spokes of the derricks that fracked their way through the lands.

Yet, today’s lenders harken back to an age of stodgy bankers requiring actual performance. Being burdened with investments in losers like WeWork, Uber, and other failed startups does little to bolster lending confidence.

Ironically, it’s beginning to claim the least capitalized of the drillers. Larger companies face fewer competitors. Their large coffers allow them to invest in operations without relying on the banks.

Put simply – the few and the profitable remain.

The EIA report due out Thursday gives a look like last week’s one on Oil. Last week saw crude inventories rise. Yet, the longer maintenance cycles of refineries helped extend the backlog. I want to see how the weekly inventories do on Wednesday and in the coming weeks.

A downgrade few agree with

Indian politics stepped into the spotlight this past week on a Moody’s downgrade. The rating agency (cause they never get things wrong) downgraded Indian debt to negative from stable. Bank of America Merill Lynch sees a “shallow recovery” in early 2020.

The fast-growing economy decelerated to a six-year low of 5% in June. Despite the reasonably pro-business government, the country faces a growing population without jobs.

The bottom line

The market’s way overextended. But, that doesn’t mean they can’t make one last move just to slap you in the face. That doesn’t mean we crash out from here.

But, I like being long volatility when others bet against it…

Next Week’s Calendar

 

Monday, Nov 11th

  • Singles day! Time to cry alone in public.

Tuesday, Nov 12th

  • 4:30 PM EST –  API Weekly Inventory Data – Our first look at crude inventories
  • Major earnings: Advanced Auto Parts (AAP), CBS (CBS), Noble Energy (NOG), Tyson Foods (TSN), Skyworks (SWKS)

Wednesday Nov 13th

  • 8:30 AM EST – October Consumer Price Index – A good inflation indicator
  • 10:30 AM EST –Weekly DOE Inventory Data – A slick look at oil
  • 11:00 AM EST – Fed’s Powell addresses Joint Economic Committee of Congress – The Fed equivalent of a parent-teacher conference
  • Major earnings: Stratasys System (SSYS)…and pretty much not a lot else

Thursday, Nov 14th

  • 8:30 AM EST – Jobless claims – One of the economic bright spots
  • 8:30 AM EST – Produce Price Index – Find out if tariffs burden input costs
  • 10:30 AM EST – Weekly EIA Natural Gas Inventories – Will the rally continue?
  • Major Earnings – Applied Materials (AMAT), Wal-Mart (WMT), Nvidia (NVDA)

Friday, Nov 15th

  • 1:00 PM EST – Baker Huges Rig Count – Will Derrick show up to the party?
  • Major Earnings: Hewlett Packard (HP), JC Penny (JCP)…how are they still around?

Source: TotalAlphaTrading.com | Original Link

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Jeff Bishop’s Total Alpha Trading Strategy | Three Winning Volatility Trades

There are three ways I think you can play the next volatility spike in the market. If played correctly, it could generate substantial returns for myself—and life changing for others.

3 Winning Volatility Trades

First, the VIX isn’t a stock. You can’t trade it on the open exchange.

There are three main ways to trade the VIX: ETF products, futures, and options.

ETF products come in two varieties – leveraged and unleveraged.

VXX tracks short-term volatility through futures and other products. The ETF trades on the open exchange like a normal product.

However, because the VIX is mean-reverting, and futures strategies cost money to execute, the VXX loses value over time.

VXX weekly chart

The UVXY works similarly but as a leveraged product. This means it tracks the daily movements of volatility by twice the normal amount.

With the same costs as the VXX plus degradation from being a leveraged product, the UVXY erodes in price much faster over time.

UVXY daily chart

My favorite trades work with either options and/or stocks on the ETFs, or options directly on the VIX.

So let’s get to it, shall we?

  1. Covered calls

Good ‘ol covered calls never stray far from my heart.

They’re one of the first option trades we learn how to do.

Now, I’ll show you how to work them properly.

Timing this trade is the key. Jump in too early, and you bleed out slowly.

I like to use the VVIX as a gauge for potential volatility. When I see it starting to move higher, I take that as a signal for a possible spike in the actual VIX.

As a quick refresher, the VVIX is the VIX of the VIX. It measures traders’ activity on the VIX options.

Once I see the VVIX moving from the ’80s to the ’90s, I plan my move.

I like to do what’s known as a ‘buy-write.’ This is where I buy the stock and sell call options against it immediately.

It’s another form of a covered call.

My sweet spot is right at-the-money. That pays me the most extrinsic value possible on the trade.

I don’t like these trades to last more than a few weeks. If volatility hasn’t spiked by then, my timing was off.

The goal here is to have the ETF spike on a jump in volatility. That puts the options deep-in-the-money and converts the extrinsic value to intrinsic value.

Then, you simply close the trade and take profits.

Easy trade to execute. Timing is the biggest challenge.

  1. Long VIX options

VIX options aren’t my favorite option (pun intended). They can be very tricky to play, and may not pay out a lot.

But, done right, they have extremely high win rates.

This play relies on searching for extreme lows in the VIX coupled with lows in the VVIX. We actually saw this scenario recently.

VIX daily chart

You can see how the VIX got down near $12, which came very close to the lows of the year.

At the same time, the VVIX got relatively near its lows before turning around.

VVIX daily chart

This meant you could buy long calls in the VIX at extremely low prices for very cheap.

Since then, we’ve seen the VIX pop up nicely over $13, which could yield a solid profit.

  1. UVXY Call Spreads

This is another trade with a high win rate that pays handsomely.

The construction is pretty straightforward.

You want to sell a call spread at or slightly in-the-money when the VVIX gets up between $115-$120, the VIX is over $20, and the UVXY has spiked at least 40%.

It may seem like a lot at once. But, those criteria help you pick off the tops in volatility during market downturns.

You can see it in action in mid-august. The VVIX spiked up near $118, the VIX jumped over $20, and the UVXY nearly doubled.

UVXY daily chart

In this example, you would sell a call spread around $36-$38. You want to give yourself about 1-2 months on expiration.

That lets volatility get sucked out of the market at least once, putting you in a profitable position.

You don’t need to get full profit. If you manage to 25%-50% profit, you’re doing just fine.

This is, by far, my favorite trade to play. It may only come a couple of times a year, but it’s so easy and consistent.

These aren’t the only tricks I have in my bag.

If you’re ready to open up the toy chest then come join me at Total Alpha.

I’ll show you how you can become a multi-millionaire option trader.

Click here to join Total Alpha

Source: TotalAlphaTrading.com | Original Link

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