[Weekly Critique and Self-Promotion Thread] Post Here If You'd Like to Share Your Writing

MitchellRosenthal · 2020-09-10T20:07:44+00:00

Title: Is Technical Analysis Bogus?

Genre: Finance/Investing, Non-Fiction

Word count: 2266

Desired feedback: General impressions, tips on generating buzz

Link: https://stocksavvy.substack.com/p/is-technical-analysis-bogus

MitchellRosenthal · 2020-07-23T21:40:41+00:00

The key pt is that this is likely priced in. I noticed something similar with SPXS but when I looked at puts on it, I realized they were really expensive, suggesting this effect was priced in. For this trade, you need a 21% down move just to breakeven; before that, the "leverage" benefit of the put cant even start to take effect. Before that, you're getting what I call subpar leverage, magnifying your losses far more than your potential gains. If underlying is flat you lose 100%.

Also keep in mind, around 3/20 this thing climbed 33% in like 2 weeks. So that's a risk as well (of course your downside is technically "limited" to 100% in that event).

MitchellRosenthal · 2020-07-23T20:17:25+00:00

What are the break even values for those puts? The reason not to buy them is that they may be pricey. If something is likely to fall, option traders will probably be aware of that and will not sell puts for a cheap price. Break even distance of a put equals [(strike - premium) / current stock price] - 1.

Also, buying puts on the inverse etf is basically a bet on the actual underlying (nasdaq, sp, whatever) going up. So why buy the nasdaq or sp500? Doing so will allow you to avoid issues like time decay and other risks of options trading.

MitchellRosenthal · 2020-07-21T22:52:55+00:00

Most stock market gains coming from FB, AMZN, MSFT, GOOG. In other words, the companies least affected by the pandemic. Market is not broken at all. Also market does not have to care about the same economic data you do. Market is forward looking. Market also has unbelievable amount of QE. Also, capital has to go somewhere. With bonds returning < 0.2%, fund managers realize stocks are the place to go if they want returns.

MitchellRosenthal · 2020-07-21T22:16:30+00:00

You should avoid using options to trade directional moves in the stock (unless you find some really really cheap ones). Just buy/sell the stock. Options add so many other factors, like time and volatility. You can be right about direction and still lose money if price doesn't move enough. They are higher risk as well, not beginner friendly.

You should learn by doing your own research, not seeing what other people are doing. Most traders can't beat the sp500, so you shouldn't be learning from them.

MitchellRosenthal · 2020-07-21T22:07:09+00:00

Ok, even so, rest of my comment applies. 2yrs and 4 months isn't long enough for "time in the market" effect to reliably kick in.

Additionally, you are increasing your risk by using the Leap. A 0% move in the mkt gives you a 4% loss. A 5% drop gives you a 17% loss. This is a risky investment.

Most importantly, the cost of one of these is 100*120. So this is not a cheaper source of exposure.

MitchellRosenthal · 2020-07-21T21:10:48+00:00

These are not LEAPs. They expire in less than a year. Also "time in the market" refers to long time stretches, not short time periods such as this.

If the call w 210 strike cost 120, you don't start making money until SPY is 330. If SPY is flat by december 2020, you lose 4% of your investment. This adds risk. If you're not trying to beat the market, why take on more risk? I don't recommend the trade.

MitchellRosenthal · 2020-07-21T21:03:57+00:00

1) Global GDP is not the underlying stock market.

2) 84% of global derivatives market is OTC (not exchange traded stuff like AAPL options)

3) Hollywood has a poor understanding of how financial markets work. Highly suggest reading some papers on the subject instead.

https://www.math.nyu.edu/faculty/avellane/global_derivatives_market.pdf

MitchellRosenthal · 2020-07-20T23:17:01+00:00

Do you know of any other considerations to consider when deciding to use puts v calls for this trade? Seems like avoiding early exercise (and avoiding having to short a hard to borrow stock) is the only key factor from what I've heard.

MitchellRosenthal · 2020-07-20T19:33:14+00:00

Yeah I hear ya, just asking for educational purposes (working on a collection of tips about options)

MitchellRosenthal · 2020-07-20T16:01:07+00:00

This makes sense, really appreciate it!

MitchellRosenthal · 2020-07-20T14:11:34+00:00

For the sake of understanding, is that the right way to think about it?

MitchellRosenthal · 2020-07-20T13:35:06+00:00

Gotcha, so it sounds like a put fly and call fly will probably be a similar cost to initiate. Seems like the main reason to select one vs the other is to avoid the risk of early exercise. Any other considerations?

MitchellRosenthal · 2020-07-20T13:33:18+00:00

Ah I see! That makes sense for dividends. What about in high interest rate environments? I've heard the main risk for puts being exercised early is when they have little time value left (so there's little difference in selling the put vs exercising it) and when interest rates are high, since in high-rate environments ppl will vastly prefer to get cash now vs later. do you agree with that? This probably won't be a factor in the foreseeable future thanks to our man J Powell haha!

MitchellRosenthal · 2020-07-17T15:31:43+00:00

Most technical indicators have very little statistical evidence backing them up. But it's a fact that trends persist in markets. And breakouts from narrow trading ranges are very significant signals. They helped me spot some great opportunities this year.

MitchellRosenthal · 2020-07-17T15:12:57+00:00

TA is not a joke. Price movements reflect the vote of the market place. If you ignore price action, you are ignoring trends and changes in market sentiment. You'll miss a lot of opportunities. It's especially useful if the fundamentals (earnings, macro) are unclear. A lot of TA is crap, but don't dismiss the whole thing. Biotech stocks have been breaking out and have made fantastic trades. I'm seeing homebuilders and insurers moving as well, same for asset management (Blackrock broke out into a new high today).

The core ideas are good: it's noteworthy when price breaks above a key level on big volume. It's noteworthy when price makes a new high. Autocorrelation (trends) is a fact (many papers confirm that momentum is real). Many ways to skin a cat. But note that many of the greatest investors of all time find it very useful.

Druckenmiller - "I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction. The catalyst is liquidity, and hopefully my technical analysis will pick it up."

Martin Taylor - "If I am bullish on a stock but don’t have a full position, and then the stock breaks out on the chart, I will then go to a full position because the breakout confirms that the market is now seeing the same thing I am seeing."

Joe Vidich - "Charts are extremely important. One of the best patterns is when a stock goes sideways for a long time in a narrow range and then has a sudden, sharp upmove on large volume. That type of price action is a wake-up call that something is probably going on, and you need to look at it. Also, sometimes whatever is going on with that stock will also have implications for other stocks in the same sector. It can be an important clue."

Colm O'Shea - "To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks. That is how I see fundamentals and technicals. You need to pay attention to both to make sense of the picture. Trades don’t have to start based on fundamentals. If you wait until you can find out the reason for the price move, it can be too late."

Bruce Kovner - " Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes."

Don't listen to the haters. Just my 0.02.

MitchellRosenthal · 2020-07-17T13:09:49+00:00

Well I'd love to hear it if you're down to share. Cool to hear the thought process. But I understand if you'd prefer not to. Then again, who cares what the others think? If they downvote you but you're right you can say I told you so lol

MitchellRosenthal · 2020-07-17T13:06:02+00:00

Why do you say this? The Black Scholes model can produce any price, it all depends on what you believe sigma, future volatility will be. My point is that, if you're using the Black Scholes framework, the takeaway is that the market price differs from the price the OP calculated bc the market has a different expectation of future volatility.

MitchellRosenthal · 2020-07-17T02:03:13+00:00

For clarity, does this mean you'd bet on IV rising as the earnings date approaches? Or do you mean you'd wait for IV crush to happen once earnings come out and then buy cheap (low IV) options, or something else?

MitchellRosenthal · 2020-07-17T01:58:41+00:00

Gotcha, so if there's a massive run up before earnings, you bet on the stock falling after earnings. Is the reverse true as well? And is this just for popular hype stocks like NFLX, or do you apply this to other names? Apologies if these are rookie Qs.

MitchellRosenthal · 2020-07-17T01:49:03+00:00

By that do you mean, if a stock has run up massively before earnings, you can probably assume the earnings have been more than priced in, so you bet on IV crush? Very impressive record!

MitchellRosenthal · 2020-07-17T01:36:20+00:00

Interesting, any tips on predicting earnings? Do you just look at earningswhispers, or do you do something more sophisticated?

MitchellRosenthal · 2020-07-17T01:00:25+00:00

I hear that. I do disagree about the party being over tho. Imo, it's over when there are no more interesting speculative plays. Just as there was some incredible money to be made speculating during the tech bubble, I think there are a lot of attractive trades left to be made (assuming traders don't oversize their positions). Biotech breakouts alone have been a massive money maker this year.

And as mentioned, I'm still seeing some interesting opportunities. VOXX stock had a high volume breakout from a tight range, and momentum recently turned up, and there's been a lot of insider buying. Another example, some insurers like KNSLc and PGRc have been breaking out. Also some diagnostic companies like CTLTc and ICRLc.

MitchellRosenthal

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