Swing Options Tips – Market Outlook – January 28, 2020
Market Outlook:
After markets had a reversal day on Friday, we gapped lower on Monday morning on fears of global coronavirus cases. Despite recovering most of the losses from Monday, we are close to filling the gap at $327.36 on SPY and is a key level to keep an eye out on. On a weekly chart, we see the same potential gap fill, providing a potential entry for a move lower on the broad markets. Markets have remained stubbornly overbought on the back of the Feb continuing to pump liquidity into the market, as pointed out by Steve Sosnick from Interactive Brokers.
Volatility Outlook:
Looking at volatility, the VIX spiked briefly to the 19 handle, before quickly backing off and easing back below 16 on Tuesday. This suggests that the market’s fears have receded and may suggest that this is a temporary bottom in the markets. Furthermore, looking at the ratio of the 3 month VIX to the VIX, which has been a reliable indicator of market bottoms, has also provided a signal for a temporary bottom in the markets.
Options Positioning:
As an options trader, we’re focused using this pullback in volatility to consider taking profits on long positions and selling premium such as covered calls on equity positions to generate yield. I would hold off on entering new positions unless we confirm that the gap fill provides either a clear case for a further pullback towards $302 on SPY or a continuation higher from this temporary bottom. A break back above $327.36 would bring a long list of potential long symbols in play, but I prefer using options to gain long exposure in a market that is so heavily overbought. Call options and call debit spreads allow for upside exposure with minimal risk vs. other strategies such as credit spreads in this environment.
Stocks on my watchlist for a potential long setup:
PYPL: Bounce off $112 support provides possible revisit to $120 highs
KMB: Holding $142-143 support level, look for continuation higher
BMY: Bounce of $63 support should provide momentum to $68 highs
COST: Breakout from 6 month consolidation range provides continuation higher
SNAP: Bounce of $18 support and consolidation range provide good long entry risk/reward