Predictions for Friday, January 28th 2022
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Our weekly predictions are here, available exclusively to our subscribers (competition participants get it a day and a half earlier if they leave their email), for Friday, January 28th 2022 (4pm EST; at market close). Keep in mind that our accuracy is much better for low volatility assets, so interpret the predictions with caution. For an overview of our accuracy thus far, see here.
Our estimate for the Friday close for our 5 major indicators and 2 stocks this week is the following:
As you can see, our predictions were quite bullish for the week, in anticipation of Powell’s speech. Unfortunately, Powell’s speech ended yesterday’s rally and sent everything in the opposite direction. We will see by Friday.
We sent an email to our competition participants explaining what we did. We bought the usual iron condor for the SPY, but this time at much wider margins than usual. Why? Because the SPY featured increased implied volatility (IV) this week, meaning that the prices of its options contracts went up.
(I have a quick thread explaining why this happens)
All you need to know about option IV is that with high IV the stock needs to rise (if you bought a call) with significant volatility. If it doesn’t, IV goes down, as does the price of the option. And you lose money.
But since we were selling a neutral options strategy, we aren’t that much concerned about the price of an individual option. On the contrary, this gives us an opportunity to get a wider margin around our predicted level of 4450 for S&P500 (which would be around 443 for the SPY). So we sold 10 iron condor SPY 28/01 contracts at 431/432 to 450/451, for an immediate gain of $540 (10 contracts * 0.54 price * 100 shares). See the screenshot below.
Therefore, we lose money (a max of $460) if SPY breaks above 451, or falls below 431. In other words if it breaks the 2% confidence intervals around our prediction.
Usually, with lower implied volatility and lower option prices we are unable to get $400 to $500 from such a wide margin. Typically for a 2% C.I. we would get around $200 while risking $800. This is too asymmetric for my taste. So we pick lower boundaries for lower asymmetry and higher immediate gain.
But we also run hedges. The upward hedge is covered by buying one SPY 28/01 call at 436 strike (costs us $984 - a bit high due to higher IV, as explained earlier). This means if SPY breaks 451 on Friday we get over $1000 profit from the call hedge, and lose $460 from the iron condor. If it ends up around our target of 443, we get to keep the $540 from the iron condor and gain an additional $390 from the call.
But, if the markets go down and break the 431 lower boundary, we lose both from the call and the iron condor. Our maximum exposure is therefore $984 + $460 = $1444 (max potential loss). However, to cut this in half, we apply a stop-loss order when the losses on our positions hit 50%. There is also a risk here that the market might move too fast for us to be filled on the optimal price while going down, but we are certainly not exposed to the full $1,400.
To sum up, the expected gain here is $930 if we hit the target, around $600+ if SPY overshoots. If the call expires worthless and the iron condor expires in the money, the profits will be around $50 ($500 from the condor minus $450 from the expired call).
The expected loss is around $700 if the market dips.
Finally, we also bought one AAPL 28/01 call at 155 strike for $845.
DISCLAIMER: This prediction survey is still in its testing phase. Neither the survey nor its results act as investment advice of any kind, nor should they be considered as such. The results of the survey need not correspond to actual market preferences or trends, so they should be interpreted with caution. Oraclum bears no responsibility for your investment choices based on these predictions.
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