Neutral to Bearish on the Breakout? Try Iron Condors, Butterflies or Credit Call Spreads! With so much geopolitical tension, inflation and rate hikes I believe there is truly a cap set on this current market. The bulls are tired and the bears have too much to feed on in the current macro environment. However, with what I believe to be a technical breakout on the S&P in the last few weeks there is a case to be a net seller in this market. One of the best ways to take advantage of derivatives, is to make money in a stagnant, range bound market by selling credit spreads and options strategies that benefit from low volatility. However, there are many other tools to make money in a stagnant environment that go beyond a simple credit call spread. In this article we’ll take a deep dive into when and how to use options to make money when there is not a clear direction in the market. First some technical analysis. After what I believe was a true breakout, we still have to pay attention to resistance in the 4600’s (which has been tested recently) and strong support tested multiple times at the 4100 level. See images below: Technical Analysis from March 16th close: Technical Analysis from March 30th close: Technical Analysis from April 8th close: CREDIT CALL SPREAD Now the most simple way to be bearish/neutral is to sell a call spread. Take advantage of market volatility and high Vega by being a net seller. Sell a slightly out of the money call on a security that you have a net neutral to bearish outlook on and buy a farther out of the money call to hedge against a bullish move in the stock. Remember, we very rarely want to sell naked call options, so the purchase of another call a little farther out of the money is crucial. Here is an example of this is shown here: selling the May 2nd 460 calls and buying the May 2nd 467 calls. This gives us a net credit of $325 and maximum loss at 471 and breakeven at 463. IRON CONDOR Next, a little more complicated way of being neutral in the market is being a net seller of a combined put and call spread. This is called the Iron Condor. The Iron condor is a combination of two credit spreads, a bull put spread and bear call spread. Remember the maximum return is the credit you receive at the initiation of the trade, meaning you want everything to expire worthless at the selected expiry. It is important to remember these key takeaways from investopedia! Here's an example of an Iron Condor. Remember that max profit is achieved when you initiate the trade, and you'll make money anywhere between your break - even strikes. Bull Put Spread^ Bear Call Spread^ Combined^ One way to think of the iron condor is you are just creating a range of which you want to be profitable. This range will be determined by your two middle strikes you choose. This makes it possible for iron condors to be more profitable when there is a slight move upward or downward - whichever you choose. LONG CALL BUTTERFLY SPREAD The butterfly spread has many different variations but one of the most simple is the Long Call Butterfly Spread. This includes buying a in the money call, selling two calls at a strike price that you feel is reasonable for the underlying to close at expiry (this is where profits are maxed), then buying one call with a higher strike price. The strike prices for the purchased outer calls are the same distance from the sold at the money calls. Even though this is a debit spread, max profit is when the underlying closes at the strike price of the class that you chose. Also, max loss is capped at the money it took to initiate the trade. Here is a sample of a Long Call Butterfly Spread with expiry of May 2nd. Here is a breakdown of the returns. Effectively your range of profit is from 450 - 461 on the S&P. Here is what those returns look like visually: Conclusion: As you can see, if done right, this trade can be very profitable and offer higher returns for a stagnant ranged market. One of my favorite trades, which is the last butterfly spread, offers an 8 bagger at the S&P at 4,560 - but a loss of 100% at anything lower than 4,500 or higher than 4,610 by May 2nd. Obviously, this is a pretty tight range but the beauty about butterfly spreads and pretty much all options strategies in general is the fact that they can be customized. As demonstrated by this article there are many ways and tools to use that accomplish the same thing. For example, someone who is a little more bearish on the broad market can put this into play: Alternative sample of a Long Call Butterfly Spread with same expiry of May 2nd. Here is a breakdown of the returns. Effectively you make money on anything below $461, but make the most at $456. Profit/Loss Visualized For traders willing to put the time in to perfect these spreads on a high conviction thesis, rewards can be plentiful. *Options Prices are out of date WORKS CITED: Yahoo Finance https://www.investopedia.com/articles/optioninvestor/09/iron-condors-wing-to-profit.asp https://www.investopedia.com/terms/b/butterflyspread.asp https://www.optionsprofitcalculator.com *Much thanks to Investopedia, Yahoo Finance, and Options Profit Calculator

Neutral to Bearish on the Breakout? Try Iron Condors, Butterflies or Credit Call Spreads! With so much geopolitical tension, inflation and rate hikes I believe there is truly a cap set on this current market. The bulls are tired and the bears have too much to feed on in the current macro environment. However, with what I believe to be a technical breakout on the S&P in the last few weeks there is a case to be a net seller in this market. One of the best ways to take advantage of derivatives, is to make money in a stagnant, range bound market by selling credit spreads and options strategies that benefit from low volatility. However, there are many other tools to make money in a stagnant environment that go beyond a simple credit call spread. In this article we’ll take a deep dive into when and how to use options to make money when there is not a clear direction in the market. First some technical analysis. After what I believe was a true breakout, we still have to pay attention to resistance in the 4600’s (which has been tested recently) and strong support tested multiple times at the 4100 level. See images below: Technical Analysis from March 16th close: Technical Analysis from March 30th close: Technical Analysis from April 8th close: CREDIT CALL SPREAD Now the most simple way to be bearish/neutral is to sell a call spread. Take advantage of market volatility and high Vega by being a net seller. Sell a slightly out of the money call on a security that you have a net neutral to bearish outlook on and buy a farther out of the money call to hedge against a bullish move in the stock. Remember, we very rarely want to sell naked call options, so the purchase of another call a little farther out of the money is crucial. Here is an example of this is shown here: selling the May 2nd 460 calls and buying the May 2nd 467 calls. This gives us a net credit of $325 and maximum loss at 471 and breakeven at 463. IRON CONDOR Next, a little more complicated way of being neutral in the market is being a net seller of a combined put and call spread. This is called the Iron Condor. The Iron condor is a combination of two credit spreads, a bull put spread and bear call spread. Remember the maximum return is the credit you receive at the initiation of the trade, meaning you want everything to expire worthless at the selected expiry. It is important to remember these key takeaways from investopedia! Here's an example of an Iron Condor. Remember that max profit is achieved when you initiate the trade, and you'll make money anywhere between your break - even strikes. Bull Put Spread^ Bear Call Spread^ Combined^ One way to think of the iron condor is you are just creating a range of which you want to be profitable. This range will be determined by your two middle strikes you choose. This makes it possible for iron condors to be more profitable when there is a slight move upward or downward - whichever you choose. LONG CALL BUTTERFLY SPREAD The butterfly spread has many different variations but one of the most simple is the Long Call Butterfly Spread. This includes buying a in the money call, selling two calls at a strike price that you feel is reasonable for the underlying to close at expiry (this is where profits are maxed), then buying one call with a higher strike price. The strike prices for the purchased outer calls are the same distance from the sold at the money calls. Even though this is a debit spread, max profit is when the underlying closes at the strike price of the class that you chose. Also, max loss is capped at the money it took to initiate the trade. Here is a sample of a Long Call Butterfly Spread with expiry of May 2nd. Here is a breakdown of the returns. Effectively your range of profit is from 450 - 461 on the S&P. Here is what those returns look like visually: Conclusion: As you can see, if done right, this trade can be very profitable and offer higher returns for a stagnant ranged market. One of my favorite trades, which is the last butterfly spread, offers an 8 bagger at the S&P at 4,560 - but a loss of 100% at anything lower than 4,500 or higher than 4,610 by May 2nd. Obviously, this is a pretty tight range but the beauty about butterfly spreads and pretty much all options strategies in general is the fact that they can be customized. As demonstrated by this article there are many ways and tools to use that accomplish the same thing. For example, someone who is a little more bearish on the broad market can put this into play: Alternative sample of a Long Call Butterfly Spread with same expiry of May 2nd. Here is a breakdown of the returns. Effectively you make money on anything below $461, but make the most at $456. Profit/Loss Visualized For traders willing to put the time in to perfect these spreads on a high conviction thesis, rewards can be plentiful. *Options Prices are out of date WORKS CITED: Yahoo Finance https://www.investopedia.com/articles/optioninvestor/09/iron-condors-wing-to-profit.asp https://www.investopedia.com/terms/b/butterflyspread.asp https://www.optionsprofitcalculator.com *Much thanks to Investopedia, Yahoo Finance, and Options Profit Calculator

Henry Hodgkins 3/8/22 As we retest the January lows, I think it is evident that geopolitical issues have unseated the Fed’s Monetary policy concerns as the number one issue for markets right now. An all out war is highly unlikely, but even a small involvement would cause already complicated Fed decisions to become more complex. It is already quite obvious that the Fed needs to raise rates and many, including myself, said they should have done sooner. However, that debate is pointless now. The new debates lie within how many rate hikes do we see in 2022? By how many bps? To what scale do we get involved in Europe? This quantitative tightening has the power to choke off the economy. Americans are already feeling the pain as prices skyrocket and consumer demand and savings rates retreat to more normal levels. Time is not on our side. As consumer demand continues to wane, we run the risk finding ourselves in a stagflationary environment. We have had the luxury of the broad majority of consumers willing to pay elevated prices, but when that willingness runs out (and that already has started), we may get into the beginning of an economic recession. Now, to the issue of conflict in Europe. In the case of war over Ukraine, the government will need to raise money. But where is it going to get it from? They cannot lower rates and they cannot print money in this environment, so financing a war will be next to impossible. I believe the government knows that - and so do the Russians. I believe that it was not a coincidence that Russia decided now would be the best time to strike. Economically, I believe that the United States is at its weakest right now, and thus will have the hardest time collecting the funds to assist in a war. Additionally, it is quite possible that we have hit peak earnings for U.S. companies and I think the market is ready for a reality check, whether we have a war or not. With so much technical damage done to the S&P, it is quite possible to head back to 4,100 or lower. (Shown by the purple line) Recently, we have seen the S&P hover around 4,300 (blue line), showing support around this level. I would also like to note the thick green candle on 2/24 in the small circle. This green candle shows the bounce off the intraday low of 4,100 its historic rise to end the day, never looking back. This gives me confidence and in my opinion it does feel like this market wants to head higher. Unfortunately, I just do not see a real catalyst for the broad market in the near future. However, this truly depends on the level of involvement of the US government in Europe. I think we could have a slow and steady recovery, decreasing inflation over time if we aren't forced to rapidly heat up our economy to fund a war effort. As far as how this will affect companies, not only are we probably hitting peak earnings, but higher prices caused by inflation will likely stay if the government needs to keep their easy money policy. Inflation means higher input costs, causing companies to raise prices or lose profitability. Either of these will decrease earnings growth. This will directly affect what Price/Earnings ratio investors will be willing to put up with as companies experience slowing growth. This is why the selling has been so disproportionate to the high P/E names. The biggest issue facing us right now is the fact that we cannot afford to finance a war. However, I do not think we are in danger of having a need to finance a war. The conundrum for the Fed is not a conundrum at all. I do not believe this market is going much higher anytime soon, but past levels of support are holding up. Going forward, I think the best opportunity for investors will continue to be in the energy trade, particularly oil. Commodities and materials will continue to do well and I think the slight pause in the financials is a great entry point for investors looking to add exposure. 1.7% on the ten year, negative real rates (see graph showing real interest rates) and $>120 for oil is ridiculous. I think we will see a seismic shift into financials, much of which I suspect will be coming from massive profits in energy. (Real Interest Rates - 10 Year Treasury) Sources: Macro Trends Yahoo Finance