Vecchio Heeds Sosnoff’s Warnings, An Easy Guide to Earnings, The Wheel Strategy | tastylive's Weekly Roundup

Our best stories on YouTube this week.

• Tom Sosnoff sees reason for caution as markets rise.
• This is your simple guide to earnings season.
• Stock market crashes are mostly unpredictable, but these tools can help.
• Don’t use this options strategy until you understand how to manage it’s risk.

Opinions of the superior film in the Barbie vs. Oppenheimer debate run hot in the tastylive offices. 

Markets turn up the ignition, Tom Sosnoff pumps the brakes

In this week's financial analysis, Tom Sosnoff expressed his concerns about the current market trends. Despite the falling dollar and rising stocks, which would typically encourage traders to sell a put or two (or three or four), Sosnoff believes a lack of worry in the markets could be cause for concern. Chris Vecchio, CFA, and Nick Battista later discussed the reasons for and against this contrarian sentiment, reminding traders to always be prepared for sudden market changes.

Takeaways:

1. Despite the recent run-ups and multiple expansions, some stocks, particularly those in the middle and lower tiers, have not participated in the upside. If these stocks start to gain momentum, it could push the market higher.
2. The regional banking crisis has been a clear and present danger for the Russell, but if it starts to rally, it could signal that the worst is behind us and that other sectors may also see gains. The improving equity of banks, coupled with lower yields and shrinking unrealized losses, is creating a positive feedback loop that is boosting confidence.
3. The market seems to be comfortable with the Fed's control over inflation, as indicated by the ISM Services index's prices paid component. The correlation between this component and headline CPI suggests a lower inflation rate by September, giving the Fed room to potentially cut rates.
   

If you’re trading earnings, watch this first

When considering trading earnings, it's essential to look at the broader themes that determine how certain stocks, such as Nvidia Corporation (NVDA), Netflix (NFLX) and Apple (AAPL) might trend before, during and after earnings. Market expert Jermal Chandler suggests that understanding these themes could provide traders with valuable insight and potentially better trading outcomes.

To see what the three themes are, watch Chandler’s full analysis and read his article on earnings here. 

Markets can crash at any time. Use these two tools to manage that risk.

When markets crash in 2020, how could traders measure, prepare and understand those concepts? We broke down how traders can understand skew and kurtosis to manage their risk. 

Takeaways:

1. Skew measures the asymmetry of a distribution and the degree of positive or negative tail risk.
2. Kurtosis quantifies the extreme outlier values in either tail.
3. In the 2020 market crash, there was a negative skew in the price of options, indicating a longer tail on the left side of the distribution. This means that the biggest market moves were to the downside, resulting in more fear and risk to the downside.
4.  In the post-crash recovery, there was a positive skew in the price of options, indicating a longer tail on the right side of the distribution. This means that the biggest market moves were to the upside, reflecting a market rally or recovery.
5. Higher implied volatility rank (IVR) in stocks is associated with a higher probability of outlier moves and a higher kurtosis, indicating fatter tails. This suggests that there is heightened risk in markets with low implied volatility, as there is a greater chance for large movements in stock prices.

99% of traders make this mistake with the wheel strategy

This week on Options Trading Concepts Live, Nick Battista and Mike Butler gave a full breakdown of the wheel strategy. Traders across account types and risk tolerance can find ways to leverage this strategy, but make sure you watch Battista and Butler’s full breakdown to understand common mistakes traders make. 

Takeaways:

• Short-term vs. long-term Use: The Wheel strategy can be used as a longer-term strategy, but it can also be employed for shorter durations, such as 30 to 60 days or even weekly time frames. It can be used as a way to quickly reduce cost basis and enter a stock position at a more favorable price.
• Risk management and conservative approach: The Wheel strategy is considered a more risk-averse and conservative approach, making it suitable for traders in IRA accounts or those who want to be in shares more efficiently. It allows for a higher probability of success and protects against downside moves.
• Limitations and trade-offs: While the Wheel strategy offers benefits such as collecting premium on both sides of the market and reducing PL volatility, it also has limitations. By capping the upside profit potential, traders give up the opportunity for unlimited gains. However, the strategy can still be profitable in sideways or slightly moving markets.

Eric Villa is a YouTube specialist at tastylive. 

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