2021-01-31 Sunday

WEEKLY MARKET OVERVIEW

Last week the market reminded all participants that prices can’t go up in a straight line. The gap down at the opening on Wednesday and subsequent sell-off throughout the session have been the first signal that the recent uptrend was due for a break. After a failed rebound attempt on Thursday, more selling pressure on Friday has been pushing prices below the 2020 highs at the weekly close.

SPY – Short term chart

Nobody knows what will happen next week but in case of another failed rebound, the next support level to watch on the S&P500 (SPY) will be around $363. If also that will be lost we might slip down to a test of the presidential election breakout around $353. 

SPY – Long term chart

Despite the severe losses on a week to week basis, January’s monthly performance of most indices doesn’t look so dreadful, and actually, it’s pretty spectacular for one of the more aggressive areas of the market such as Small Caps (IWM).

IWM – Monthly chart

Weekly performance (Week 4/2021)
– SPY (S&P500) -3.35%
 QQQ (Nasdaq100) -3.34%
 DIA (Dow Jones Industrial) -3.28%
 IWM (Small Caps) -4.39%

Monthly performance (January 2021)
– SPY (S&P500) -1.02%
 QQQ (Nasdaq100) +0.26%
 DIA (Dow Jones Industrial) -1.96%
 IWM (Small Caps) +4.85%

Volatility (VIX) exploded on Wednesday and has been jumping all over the place since, even if we are still below the 40 level.

VIX

WEEKLY TRADING JOURNAL

My weekly trading activity has been very minimal. After selling a CSP (cash-secured-put) on Monday I spent the rest of the week on the sidelines waiting for my 10 options contracts to expire on Friday night. As I started to see the dark clouds at the horizons I decided to assume a more defensive approach and wait for the dust to settle before taking any more risk in my portfolio. As always capital preservation is the number one rule for long-term trading success.

My only covered call was on WMT and expired worthless on Friday leaving me the full premium and the ownership of the shares. Despite the drop from the assignment price, I was able to reduce my overall cost basis due to the premium collected selling one cash-secured-put and 3 covered calls, and managing so far to keep the position in the green.

WMT

All my other 9 option contracts were CSP (cash-secured-puts) and despite the weekly sell-off I managed to get assigned only on 3 of them (CAT – JPM – TGT). Assignment is part of the wheel strategy game and I have no problem holding these stocks until the price will recover and allow me to start selling covered calls. 

CAT
JPM
TGT

I let also the other 6 cash-secured-puts (DDOGMTCHNIOPINSPTONSQ) expire on Friday as I wanted to keep the full premium and had the cash ready to take assignment in case they were going to close below the strike. The outcome of a few of these has been decided only at the very end of Friday’s session.

DDOG
MTCH
NIO
PINS
PTON
SQ

The total of premium collected for the week has been $2,126 (net of brokerage fees) with an average holding period of 10 days and an annualized return of 65%. About half of my wheel strategy portfolio is now invested in stocks while the rest is in cash with a part of it already allocated to secure the other two CSP still open. I will enter next week with enough liquidity to take advantage of a further market drop (buying more cash-secured-puts of my favorite stocks) while in case of a rebound and upward price action I will start selling covered calls on the shares I already own.

In case you have any questions just send me an email at info@thewheelstrategy.com

Take care and trade wisely

Gianmarco