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Kim

CMLviz Trade Machine

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Before ever entering a trade, we need a plan. For example, we want to know whether we should avoid earnings, or trade with earnings. Knowing where to place a stop loss, and even a limit gain. Knowing which strike to trade. Knowing whether to trade the monthly or weekly options.

But it even goes further – even if we know which direction we think the stock will go – do we sell puts or sell a put spread? Do we buy calls or a call spread? Should we be net owners or sellers of volatility? Has there been measurable edge in the trade in the past, or not?

This is how people profit from the option market — it’s preparation, not luck.

All of these questions were designed to be answered with the CMLviz Trade Machine, which is an option back-tester created by Capital Market Laboratories (CML). I have been in the same circle as this company’s founder for years.

CML is in fact a member of the famed Thomson First Call roster. Their research sits side-by-side with Goldman Sachs, Morgan Stanley, Barclays and the rest of the bulge bracket banks, but they have a different goal: To break the information asymmetry that exists between the top 0.1% and the rest.

To learn more about the product, you can tap on the link below. You will see a 4- minute video demonstration. I think, for many of you, it will become a valuable tool to supplement your trading and the analysis that Steady Options provides.

Tap Here to Watch the Video and Sign Up

P.S. Our members know that I rarely promote other products. But this one really got me excited. I encourage you to give it a try. They plan tons of additional functionality in the upcoming months, including custom strategies to trade around earnings which can be a great benefit for us.

 

CMLviz Trade Machine is constantly adding new features, and the price will be increasing as new features are added. Those who sign up are grandfathered at the price they signed up even as the prices increase.

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Hello all. I'm here to answer any questions you have about the Trade Machine (option back-tester). Have a great weekend!

 

Who is this guy?

 


Ophir Gottlieb (CEO & Co-founder) — Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories (CML). He contributes to Yahoo! Finance, CNNMoney, MarketWatch, Business Insider, and Reuters. He was rated the 14th best finance follow on all of Twitter.

 

CML is a member of Thomson First Call.

 

Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model (AGR), both now owned commercially by MSCI. 

 

Mr. Gottlieb’s methodological approach taken in creating FAM was endorsed by the head of artificial intelligence for the state of Germany as a novel and extraordinary application of advanced machine learning and quantitative finance.

 

FAM and AGR are used by asset managers worldwide with over $1 trillion of assets under management. The FAM model has made Mr. Gottlieb one of the most recognized names in all of quantitative finance.

 

Mr Gottlieb’s mathematics, measure theory and machine learning background stems from his graduate work in mathematics and measure theory at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors.

 

He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire, NY Times, and through re-publications in Barron’s, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Edited by Ophir Gottlieb

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I agree. It does look very interesting. I am always looking for various types of "screeners/scanners" related to options.

My only problem with the presentation video that we were sent, is that all of the hypothetical backtests you performed, had a look back period of 1-3 years and the types of strategies you used (ex. selling puts) are not presenting a fair picture since the market has basically gone straight up, most of the time, except for a handful of exceptions, over the past 5+ years.

If you just pick a strategy that involves selling puts , or put verticals, and remove earnings exposure, common sense would tell you that you are probably going to get a positive picture.

You need to make a "fair and balanced", showing both sides, in your presentation which would include, for each test, 2 opposites.

For example, do the same backtest with selling calls, or call verticals, using all of the same restrictions (ex. no earnings exposure).

Or, do the same exact backtest by using an underlying that has zero correlation to the (stock) market ( ex. corn, sugar etc).

I would also like to know how extensive you can go with the searches you create.

For example, I would love to scan for calendars, where the front expiration is trading at a much higher IV than the back expiration.

I know that this almost exclusively occurs during the time frame leading up until earnings but, on rare occasions you do find them during non-earnings periods.

This also would give us a great way of backtesting one of our favorite strategies that we do here.

We could setup calendars that we would only put on if the front IV is higher than back IV and "exclude earnings" exposure.

This way we could actually backtest our own strategy, and see how it performs, on a wide variety of underlyings going back in time.

Also, do you include commodities in your data?

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You are right. But you still have an option to indicate different deltas, compare naked puts to put spreads, set different price target and stop losses etc.

Question I got by email:


 

I liked this video. Will I be able to back test our earnings and non-earnings SO strategies? 
 
Will this also help back test our new RUT strategy? I remember that you back tested this manually quite recently.
 
Will you be using this software going forward yourself? 

 

Answer:

Current, no. But Ophir mentioned to me that they are developing an option to do custom strategies where you can do virtually whatever you want - open x days before earnings, close y days before/after earnings, define custom strategies etc.

 

And yes, I will be using the tool.

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12 minutes ago, Kim said:

You are right. But you still have an option to indicate different deltas, compare naked puts to put spreads, set different price target and stop losses etc.

Question I got by email:


 

I liked this video. Will I be able to back test our earnings and non-earnings SO strategies? 
 
Will this also help back test our new RUT strategy? I remember that you back tested this manually quite recently.
 
Will you be using this software going forward yourself? 

 

Answer:

Current, no. But Ophir mentioned to me that they are developing an option to do custom strategies where you can do virtually whatever you want - open x days before earnings, close y days before/after earnings, define custom strategies etc.

 

And yes, I will be using the tool.

Well, I just got too excited and immediately bought it!

But, people should be aware that they are getting A LOT more than ONLY the "Trading Machine" program.

There is also a wealth of educational material and ideas, that is sort of laid out in a similar way as you do at SO.

I thought I was just getting the program, but I was happily surprised to find that it includes so much more.

I think I will be glued to my computer for the next 2 days.

I just wish they had "Calendars" as one of the choices of strategies.

Edited by cuegis

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Hi there.

We cover equities, ETFs and indices, but not commodities.

 

We are adding a custom strategy with in a few weeks, that will allow you to break out of the pre-created strategies, and create whatever you like, up to 4 legs. This will cover calendars as well as broken wing butterflies and really any other construction. You will be able to create as many as you like and save them, to use/test them again at any time. This will likely sit in a new "advanced mode" so the simplicity of the standard mode will remain, but more advanced usage will be easily accessible. 

 

We are also adding the functionality to trade 'x' number of days before earnings and close 'x' number of days after. Right now we have this, but it is set at 2 trading days -- soon the flexibility to choose your own will be available.

 

With respect to back-testing a shortput spread over the last 3-years, I understand your point, but it really isn't the goal of the back-tester. The point is, if you have a belief that the next year (or six-months, or one week, or whatever), will be somewhat similar to the last 6-mos, 1-year, 2-years, 3-years, or whatever you select, then you can pinpoint exactly which deltas, what timing of opening and closing, which length of options and how to handle earnings.

 

Irrespective of market direction, for example, owning a call or a call spread in some names, like Veeva Systems (VEEV) has been a big loser even though the stock is up 100%. However, selling puts, or puts with a stop, or a put spread, has returned 2-3x the stock. What we're seeing here is not some magic future telling crystal ball, what we're seeing here is that the vol dynamics in VEEV support a pretty strong thesis that being a net seller of premium (and vega, gamma and theta) has been substantially better than being a net buyer.

 

For reference here is a link to that story: 

http://www.cmlviz.com/cmld3b/index.php?number=11369&app=news&cml_article_id=20170328_investing-in-upside-in-veeva-systems-inc-nyse-veev-with-options

 

While we would expect this for a stock that has moved just a little, or even a little rise, this is not the case with most stocks that have this abrupt of a rise (100%+). For most of those stocks, should you have been a net buyer of deltas you would have done much better than the stock and certainly selling the downside preimum. VEEV is just one example of how a mass calculation with a few clicks can uncover vol dynamics for a company that would not have clear otherwise.

 

Further, and more broadly, whether we are in a bull, bear, or sideways market, stock dynamics also tend to repeat. So, for some stocks, selling a put and closing with a 80% limit gain (i.e. sell a $2 put, buy it back if it goes to $0.40) has a massive effect on returns. That's bc some stocks tend to bounce rather wildly around expiration, or even more broadly, within expirations (the 80% limit is just random to this example, you can test any limit you want).

 

Imagine a stock that trades for $100, we're short a 95 strike put @ $2 and option goes to $0.40, 15 days before expiration, with the stock at $98. Some stocks, this is just a hold -- let the options expire worthless.But there are stocks that tend to vacillate wildly and all of a sudden, the stock goes to $94 and the put hits $3.

 

There's no real way to measure this behavior comprehensively without a back-tester unless you really have a lot of data and code up your own HV analysis (which is awesome if you do). 

 

Hopefully the purpose of the back-tester is clearer now. As an aside, we will be adding stock technicals as well, so you can trade option strategies with entries and exits based not only on earnings, stops and limits, but also on technical triggers. 

 

Thanks!

 

Ophir

 

 

 

 

 

 

Edited by Ophir Gottlieb

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2 minutes ago, cuegis said:

Well, I just got too excited and immediately bought it!

But, people should be aware that they are getting A LOT more than ONLY the "Trading Machine" program.

There is also a wealth of educational material and ideas, that is sort of laid out in a similar way as you do at SO.

I thought I was just getting the program, but I was happily surprised to find that it includes so much more.

I think I will be glued to my computer for the next 2 days.

I just wish they had "Calendars" as one of the choices of strategies.

Coming soon! 

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4 minutes ago, Djtux said:

Is this using only EOD data ? Or do you have intraday data as well ?

@Kim, can you disclose what compensation, if any, you receive from the affiliate link ?

@Djtux We use EOD data. But, in a few days we releasing a patch that will use intraday data for stops and limits.

Edited by Ophir Gottlieb

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7 minutes ago, bam1960 said:

Ophir

 

Do you have longer term subscription at better rates?

Hi Bam,

The $49 / mo is actually the promotional price. The price will go up to $99/mo (likely) once we add stock technical studies, custom strategies etc.. But anyone that signs up now does get all upgrades for the same price.

 

 

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2 hours ago, Djtux said:

Is this using only EOD data ? Or do you have intraday data as well ?

@Kim, can you disclose what compensation, if any, you receive from the affiliate link ?

Yes, we receive a percent of sales and also get a say into development to make sure the strategies we discuss at Steady Options are covered.

As our long time members know, I rarely recommend any product, and if I do, It's only ones that I'm using myself (like ONE and optionslam), regardless of compensation that I get or don't get.

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Just signed up yesterday.  I like it so far.  It's very focused on simpler mechanical trades at the moment, but it's pretty good at that.  I spent a lot of time playing around with the VXX and had some eye openers that I think were well worth the cost.

It'll be fantastic when it supports intraday data and limit orders.

It'd also be much better if you could build a little logic into the entries, like only if VIX < 20, stuff like that. 

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1 hour ago, Darcy MacDonald said:

Just signed up yesterday.  I like it so far.  It's very focused on simpler mechanical trades at the moment, but it's pretty good at that.  I spent a lot of time playing around with the VXX and had some eye openers that I think were well worth the cost.

It'll be fantastic when it supports intraday data and limit orders.

It'd also be much better if you could build a little logic into the entries, like only if VIX < 20, stuff like that. 

We are adding custom trades soon (create your own and save them). We are also adding technical indicators soon.

 

We do have limit orders already in the application.

Edited by Ophir Gottlieb

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@Kim @Ophir Gottlieb and other contributors, thank you very much for the information. I'm wondering what does it mean "soon". It seems a lot of new useful features are prepared to be released. Could you be more specific and share with us whether we can count it in days or weeks rather than in months or years? Thank you once more and good trading.

Edited by Petr

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5 hours ago, Petr said:

@Kim @Ophir Gottlieb and other contributors, thank you very much for the information. I'm wondering what does it mean "soon". It seems a lot of new useful features are prepared to be released. Could you be more specific and share with us whether we can count it in days or weeks rather than in months or years? Thank you once more and good trading.

Wednesday (end of day)

- Trade downloads in Excel

- Trades copy and paste into excel with one click

- Intraday pricing for stops

Next Monday (end of day)

- 4 years of data

- Spreads based on dollar denominated amounts (we already use deltas). 

  (backtest a $5 wide spread that is $2 out of the money, as opposed to 40/20 delta spread)

 

Three Mondays from then

- Custom strategies (up to 4 legs)

- Custom days before and after earnings trading (we have 2 by default now)

 

Actually a lot more coming, but for competitive reasons we will not make it public unless you are a member.

 

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@Kim Just based on curiosity. If this software is so great (and the team seems to be active in making much more development in the future), wouldn't that affect your own subscription? Now everyone can find his/her own trade with a few clicks. It's still some work to do, but it's much easier and less tedious than starting from scratch. Again, I'm just curious and you may not care about this, which is fine.

 

@Ophir Gottlieb From the video, I'm confused about the choices of prices to be used for backtesting. If you currently use EOD data, why there's still a choice about bid-ask spread etc. Or it's the last spread before the close (which can be erratic though)?

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@thanitpYou can say the same about ONE software and optionslam. But still the demand for SO service is so strong that I need to close it 3-4 times per year (will be closing again in few weeks). For every member who cancels we have 2-3 new subscribers. And most members who cancel come back after few months (or years).

I believe that no software can replace live trading and discussions that we have on the forum. Most members still consider it very valuable, but of course it's up to members. The software is supposed to be a supplement to live trades and trade discussions that we have on the forum.

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9 minutes ago, Kim said:

I believe that no software can replace live trading and discussions that we have on the forum. Most members still consider it very valuable, but of course it's up to members. The software is supposed to be a supplement to live trades and trade discussions that we have on the forum.

I agree. A tool helps, but the live trades are very valuable.

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48 minutes ago, thanitp said:

@Kim Just based on curiosity. If this software is so great (and the team seems to be active in making much more development in the future), wouldn't that affect your own subscription? Now everyone can find his/her own trade with a few clicks. It's still some work to do, but it's much easier and less tedious than starting from scratch. Again, I'm just curious and you may not care about this, which is fine.

 

@Ophir Gottlieb From the video, I'm confused about the choices of prices to be used for backtesting. If you currently use EOD data, why there's still a choice about bid-ask spread etc. Or it's the last spread before the close (which can be erratic though)?

If I had to choose one and was forced to just choose one, I would, every day of the week, choose a professional option trader on my left shoulder over software. I, too, am a pro, was a market maker on NYSE ARCA and CBOE. That experience is immensely powerful. Luckily, we don't need to make that  choice -- we can have both -- the experience of pro trader and the power of the back-tester. I say this totally aside from being the CEO of Capital Market Laboratories, having a tool like the back-tester with a voice of experience, reason and intelligence like Kim, is, in my opinion, a total no brainer if you really intend to profit consistently from options. 

 

And yes, I am a consumer of the back-tester as well. I use it to trade.

 

With respect to execution types -- irrespective of the time of quote, executing at mid-market, market, or half way between mid and market (our default), is critical to understanding a realistic trade analysis. Our time stamps use realistic quotes, not those crazy wide quotes at the end.

 

Thanks for your questions!  Really shrewd group here and I am very impressed. You're all very lucky to have each other.

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3 hours ago, Kim said:

@thanitpYou can say the same about ONE software and optionslam. But still the demand for SO service is so strong that I need to close it 3-4 times per year (will be closing again in few weeks). For every member who cancels we have 2-3 new subscribers. And most members who cancel come back after few months (or years).

I believe that no software can replace live trading and discussions that we have on the forum. Most members still consider it very valuable, but of course it's up to members. The software is supposed to be a supplement to live trades and trade discussions that we have on the forum.

Kim, how you position this product vs ONE, talking of backtesting?. 

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In ONE, you need to do the backtesting manually while in  CMLviz  it is much more automated. But ONE give you intraday prices in 5 minute intervals and has much longer history (around 7 years). Also, in ONE it is easier to see the prices. But of course CMLviz  is much more advanced in terms of setting a strategy and seeing results in just few seconds.

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Thanks Kim.

 

Ophir you show an interesting tool indeed, but I'd like share with you some thoughts.

I'm used to backtesting and systematic trading in the futures World, and miss some important features in all options app I see (not many by the way), maybe they are scheduled for the future or simply don't apply. For instance:

1) if you want a representative study you need a variation of market situations, taking thee or even seven years sometimes is not enough, as this is the case in some of your videos. You will test your strategy in a bullish market and that give you an edge. Not to mention that intraday testing is a must.

2) I miss predictive analysis, Walk-forward or Monte-Carlo technics to test the robustness and resilience of your strategies, that will let you know how it will behave in the future.

3) I see all options apps too "overtweaked", I mean you can tweak your parameters (stop loss, profit targets, ....) to fit the PAST, the same as you would with a technical indicator, but It is unlike to be usefull in the long term. What is worse, whenever you are against a new situation you'll never know if the stock fundamentals have changed or it is just an outlier. When your strategy is dead?.

In summary, am used to thousands of event samples with very sophisticated tools to analyze, in the futures world, that maybe "fortunately " do not apply yet to options. I say fortunately, because when you understand these future-backtesting techniques you know you'll have nothing to do in the futures trading business, and this is just the iceberg tip, with all big data analysis around the corner.

 

Your view is highly appreciated and thanks in advance.

Edited by Javier

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4 hours ago, Javier said:

Thanks Kim.

 

Ophir you show an interesting tool indeed, but I'd like share with you some thoughts.

I'm used to backtesting and systematic trading in the futures World, and miss some important features in all options app I see (not many by the way), maybe they are scheduled for the future or simply don't apply. For instance:

1) if you want a representative study you need a variation of market situations, taking thee or even seven years sometimes is not enough, as this is the case in some of your videos. You will test your strategy in a bullish market and that give you an edge. Not to mention that intraday testing is a must.

2) I miss predictive analysis, Walk-forward or Monte-Carlo technics to test the robustness and resilience of your strategies, that will let you know how it will behave in the future.

3) I see all options apps too "overtweaked", I mean you can tweak your parameters (stop loss, profit targets, ....) to fit the PAST, the same as you would with a technical indicator, but It is unlike to be usefull in the long term. What is worse, whenever you are against a new situation you'll never know if the stock fundamentals have changed or it is just an outlier. When your strategy is dead?.

In summary, am used to thousands of event samples with very sophisticated tools to analyze, in the futures world, that maybe "fortunately " do not apply yet to options. I say fortunately, because when you understand these future-backtesting techniques you know you'll have nothing to do in the futures trading business, and this is just the iceberg tip, with all big data analysis around the corner.

 

Your view is highly appreciated and thanks in advance.

Thank you for your feedback, Javier.

 

We have a slightly different view of the world in options (not stock). Since options are a derivative (not the calculus derivative, the actual English meaning) and their value is also determined by derivatives (like volatility) we do not believe more data is helpful. In fact, when I do a back-test, I rarely use 3-years, more commonly, I use one-year or even 6-months. 

 

The back-tester is designed to show us, for each underlying instrument, how to trade the options if the stock behaves "semi-similar" to the past. Option trading is volatility trading, whether you mean it to be or not.

 

That is a mantra I cannot stress enough. The back-tester allows us to look at an underlying, and rigorously test how that volatility has affected trades. It's one of the great wonders of option trading, but volatility dynamics tend to stay similar to each other for a specific underlying for quite some time (the easiest examples are VIX or VXX, but it goes down to individual securities as well).

 

I use Veeva Systems (VEEV) as my example just bc I took the time to write it up. But, this is a stock that rose 100% in 2-years, but taking three bullish approaches:

* Long Call

* Long Call Spread

* Short Put spread

 

(http://www.cmlviz.com/cmld3b/index.php?number=11369&app=news&cml_article_id=20170328_investing-in-upside-in-veeva-systems-inc-nyse-veev-with-options)

 

Two are actually losers bc of the volatility dynamics -- irrespective of the stock rise. So, for Veeva, if you happen to be bullish, being a net seller of vol is the approach that has won. Even further, stock dynamics (sometimes referred to as technicals) also tend to repeat in time (that's why ppl use technical indicators). The option back-tester also allows you to benefit from that semi-similarity when you test stops and limits. 

 

When it comes to more robust back-tests that you are used to seeing and using, that would be for a product like stocks -- where the underlying is the asset in question. I see that you use different standards for futures as well, that's actually closer to stock than options bc the derivative is so similar to the underlying that you can ignore secondary and tertiary impacts (like, there is no gamma, vega, vola, theta). 

 

We are going to be releasing a stock back-tester as well. It will have technical indicators and oscillators and it will include sensitivity analysis as you discuss.

 

My very best,

Ophir

 

 

Edited by Ophir Gottlieb

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Do you have intention, at any point in the future, of adding , at least a few, major commodities to the program ( ex. Gold, Crude Oil, etc)?

I know that there are "proxies" for these things in the "ETF" world ( ex. GLD), but it is just not the same thing.

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3 minutes ago, cuegis said:

Do you have intention, at any point in the future, of adding , at least a few, major commodities to the program ( ex. Gold, Crude Oil, etc)?

I know that there are "proxies" for these things in the "ETF" world ( ex. GLD), but it is just not the same thing.

 

Of all the things we do have planned, we do not have a short-term plan to add new instruments (like commodities). Future's options are a possibility, but not in the short-term. As you note, the ETFs are one way to get to those assets, but certainly not exactly those assets.

Edited by Ophir Gottlieb

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Another question.

This is just so that I understand what I am looking at with your results.

For example, I just ran "sell" "strangle" "Trade earnings only", on NFLX.

  1. For virtually all time frames, and all combinations of deltas, this trade was a 99% loser.
  2. There was like one, or two, 1% gains. Otherwise, we are looking at a nearly 100% situation.

So, one might think , with something so close to 100% , why not try "buying" what has historically been closest to the best (worst) performing strangles.

It is because I do not know how your data is taking implied in account on these backtests.

Specifically, when I look at these results, are they taking into account, the fact that the strangle is being put on 2 days before earnings, when IV is near it's peak, and are you accounting for a massive collapse in IV, in the "post earnings" results?

Because THAT is everything! And I need to know if that is what is being presented to me.

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9 minutes ago, cuegis said:

Another question.

This is just so that I understand what I am looking at with your results.

For example, I just ran "sell" "strangle" "Trade earnings only", on NFLX.

  1. For virtually all time frames, and all combinations of deltas, this trade was a 99% loser.
  2. There was like one, or two, 1% gains. Otherwise, we are looking at a nearly 100% situation.

So, one might think , with something so close to 100% , why not try "buying" what has historically been closest to the best (worst) performing strangles.

It is because I do not know how your data is taking implied in account on these backtests.

Specifically, when I look at these results, are they taking into account, the fact that the strangle is being put on 2 days before earnings, when IV is near it's peak, and are you accounting for a massive collapse in IV, in the "post earnings" results?

Because THAT is everything! And I need to know if that is what is being presented to me.

 

"Earnings Only" is opening two-days before earnings and closing two-days after earnings.

 

But, you can test that with weekly and monthly options. In general,owning the earnings vol in almost every other company is not a sage trade. Having said that, here is how the last year has looked for NFLX using iron condors (so owning vol but not naked)

http://tm.cmlviz.com/index.php?share_key=EnOIns9kK1nXB04j

 

In general I do not like owning earnings vol, but I know ppl who are just marvelous at it. As an aside, owning vol in general has been a winner for TSLA and NVDA, but when you avoid earnings:

 

* Volatility in NVIDIA Corporation (NASDAQ:NVDA) May Mark an Opportunity

* How to Profit from Tesla Inc (NASDAQ:TSLA) Stock Volatility

 

 

Edited by Ophir Gottlieb

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10 minutes ago, Ophir Gottlieb said:

 

"Earnings Only" is opening two-days before earnings and closing two-days after earnings.

 

But, you can test that with weekly and monthly options. In general,owning the earnings vol in almost every other company is not a sage trade. Having said that, here is how the last year has looked for NFLX using iron condors (so owning vol but not naked)

http://tm.cmlviz.com/index.php?share_key=EnOIns9kK1nXB04j

 

In general I do not like owning earnings vol, but I know ppl who are just marvelous at it. As an aside, owning vol in general has been a winner for TSLA and NVDA, but when you avoid earnings:

 

* Volatility in NVIDIA Corporation (NASDAQ:NVDA) May Mark an Opportunity

* How to Profit from Tesla Inc (NASDAQ:TSLA) Stock Volatility

 

 

That is why this is so strange to me. Because I would NEVER own outright (unhedged) IV in the period just before ( and through) earnings.

It is because of the over inflated IV (pre earnings), and guaranteed IV collapse afterward.

In the backtest link that you sent, given what I had already seen with outright longs, you would then expect to see the results that you got .

Also..."long 50 delta/short 30 delta" is really an "Iron Butterfly" (not Iron Condor) because you are long the ATM straddle.

I am unable to see, in you backtest, the amount of time you used to go back in your testing.

But, once again, I just wanted to know, in your program, when you are making the assumption that you are putting on the position 2 days before earnings, and taking it off 2 days after....are you using the the Pre, and Post Earnings IV's in your results?

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13 minutes ago, cuegis said:

That is why this is so strange to me. Because I would NEVER own outright (unhedged) IV in the period just before ( and through) earnings.

It is because of the over inflated IV (pre earnings), and guaranteed IV collapse afterward.

In the backtest link that you sent, given what I had already seen with outright longs, you would then expect to see the results that you got .

Also..."long 50 delta/short 30 delta" is really an "Iron Butterfly" (not Iron Condor) because you are long the ATM straddle.

I am unable to see, in you backtest, the amount of time you used to go back in your testing.

But, once again, I just wanted to know, in your program, when you are making the assumption that you are putting on the position 2 days before earnings, and taking it off 2 days after....are you using the the Pre, and Post Earnings IV's in your results?

 

We use prices to calculate profit and loss, not IV.

 

Also, using the words "never" or "always" in trading are generally not good places to be. Allow for flexibility in your trading process -- a trader that is inflexible to new ideas is likely one destined to failure.

 

Further, if the vol was always too high, ppl would sell it. Earnings vol pricing is not a mistake -- vol rises bc the earnings event drives a larger one-day move than the other days. It's the amount of that move that is priced into the options.

 

Example for NFLX.

The left side is the days before earnings.

The right hand side is the IV.

Just assume earnings fall on an expiration and are BMO.

Assume "normal IV" for NFLX is 35% (which is the IV180)

 

-5 35%

-4 35%

-3 35%

-2 35%

-1 35%

Earnings 100% (and expiration)

---

Avg vol 48%

 

The vol rises into earnings because the average volatility gets larger as days pass.

 

So, if we looked at this one day before earnings:

 

-1 35%

Earnings 100% (and expiration)

---

Avg vol 68%

 

The vol would rise from 48% to 68% as the earnings date approaches although "nothing has happened." It's just the reality of the days left in expiration and the weight that the one earnings day carries as the other days go away.

 

(side note: never take the average of vols, they are square roots, so this is a simple example, not mathematically totally accurate)

 

 

The vol falls after earnings, bc the event has ended. 

 

The "vol crush" happens at the same time the underlying realizes its large stock move. They are coincidental -- they happen together. There is no magic edge to holding or selling earnings vol through the event. Now, there may be a trade that benefits from the vol patterns and not holding through the event. That is... possible and the contrived example above is a pretty good step 1 of 10 to see that trade.

Edited by Ophir Gottlieb

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@Ophir Gottlieb great product ... thanks for making it available to us at a discount :)

Question - have you considered adding "max drawdown" to the summary "tiles" when running backtests?

Really looking forward to some of the new features like the excel download. Thanks again!

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"Also, using the words "never" or "always" in trading are generally not good places to be. Allow for flexibility in your trading process -- a trader that is inflexible to new ideas is likely one destined to failure."

 

 

I have been trading since 1980. I have owned 5 seats on 5 different exchanges, and was a market maker and specialist in options on all of them.

Believe me, after 37 years, whatever was "destined" to happen, would have happened by now.

I sat in a very rare seat (pun intended) to trading history, specifically options history.

So 1/3 of a century pretty much covers every event that will happen in the trading arena and it is beyond enough time to know where to be, and what to avoid.

But, I did mis speak when used the word "never". I actually did not mean it literally.

As far as literally...I do mean it literally when I say ...yes, 37 years on the floor, I HAVE seen everything!

What was not covered over the past 37 years?

Edited by cuegis

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There are successful traders who employ hold (long and/or short) thru earnings strategies. Granted that is a much different beast that must be managed differently than the "slow and steady" approaches we favor in SO.

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2 minutes ago, cuegis said:

"Also, using the words "never" or "always" in trading are generally not good places to be. Allow for flexibility in your trading process -- a trader that is inflexible to new ideas is likely one destined to failure."

 

 

I have been trading since 1980. I have owned 5 seats on 5 different exchanges, and was a market maker and specialist in options on all of them.

Believe me, after 37 years, whatever was "destined" to happen, would have happened by now.

I sat in a very rare seat (pun intended) to trading history, specifically options history.

So 1/3 of a century pretty much covers every event that will happen in the trading arena and it is beyond enough time to know where to be, and what to avoid.

But, I did mis speak when used the word "never". I actually did not mean it literally.

As far as literally...I do mean it literally when I say ...yes, 37 years on the floor, I HAVE seen everything!

What was not covered over the past 37 years?

 

Actually, you have probably seen everything several times over, really. Remember when TARP didn't pass and then the SEC didn't allow market makers to expire short in a bank stock (until Citadel changed their mind intraday) ? That was an amazing time to be a market maker -- I'll never forget it. Firm value swung by hundreds of millions of dollars intraday and it all ended up being... "just a thing."

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Just now, Gary said:

There are successful traders who employ hold (long and/or short) thru earnings strategies. Granted that is a much different beast that must be managed differently than the "slow and steady" approaches we favor in SO.

 

yeah, it's definitely something traders do, but it takes a special kind of risk tolerance. I do not trade earnings, generally. Slow, steady, high probability -- that's my preference. 

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5 minutes ago, Ophir Gottlieb said:

 

Actually, you have probably seen everything several times over, really. Remember when TARP didn't pass and then the SEC didn't allow market makers to expire short in a bank stock (until Citadel changed their mind intraday) ? That was an amazing time to be a market maker -- I'll never forget it. Firm value swung by hundreds of millions of dollars intraday and it all ended up being... "just a thing."

When I started in 1980, I was on the commodities floor (Comex, Nymex, Sugar etc.) There was no such thing as exchange traded options on futures until 1982 when they had a "trial" program only with Gold, Bonds, and Sugar just to see if it was a viable thing to do.

I traded the 1st Sugar option!.

But, while we are speaking of "do you remember"...Do you remember the massive runup in Gold, and the attempted takeover of all of the worlds silver, by the Hunt Brothers in 1980?

There were no options yet, and the futures (in silver) opened, and were locked, "limit up" every single day, for like 3 months.

The silver traders on the floor were all short and could not get out, so the eventually there was an emergency meeting of the Board of the Comex, where they passed a new rule..."Liquidation Only" to save their own ass. Then silver was locked limit down every single day for the next 1-2 months.

Pricewise, Silver started around $5, and peaked at $50.....and a silver futures contract was for 5000 ounces of silver. So, every $1 was worth $5000..PER CONTRACT, to your account. Just to give some perspective.

Thankfully, I had just started around that time so I did not have any of my own money involved. But imagine having THAT be the very first thing to witness as a very young trader......It taught me the meaning of "risk" right from day 1!

Oh...do I have stories to tell!!

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11 minutes ago, NikTam said:

I signed up last night.  Really interesting.  Some eye-opening stuff already -- I'm seeing Risk Reversal strategies on some tickers far outpacing Call/Put and Call/Put spreads....

 

Yeah, so selling a risk reversal (selling puts to buy calls) yields, more often than not, a credit, and it has upside. But, of course, it has way more downside risk.  Here is a recent take I did on Alibaba (BABA) and a risk reversal, but, I avoided earnings and used a stop loss.

 

Getting Long Alibaba (BABA) With a Risk Reversal

 

Just understand the additional risk -- it is aggressively bullish

Edited by Ophir Gottlieb

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I get that -- it is a completely bullish trade as you can lose ground on the call and get nailed on the put if the stock really craters.  A very interesting example with the BABA.  I wonder if you could hedge the position with a VXX trade -- especially with market movers like BABA, AMZN, GOOGL, etc?

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Just now, NikTam said:

I get that -- it is a completely bullish trade as you can lose ground on the call and get nailed on the put if the stock really craters.  A very interesting example with the BABA.  I wonder if you could hedge the position with a VXX trade -- especially with market movers like BABA, AMZN, GOOGL, etc?

 

Even better -- soon, when the custom strategies are up, you can sell a put spread to fund a long call, and cut the risk down a lot. We're pretty excited about the custom strategies -- about 4 weeks away.

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4 hours ago, cuegis said:

What was not covered over the past 37 years?

 

Perhaps I'm succumbing to the exhortations of "the sky will fall" crowd, but what about the sovereign debt bomb finally exploding, i.e. precipitous loss of faith in fiat currency, financial market collapse, hyper-inflation, etc?

Edited by Noah Katz

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Catastrophising is generally not the way to go, nor the people to follow.

Hard analysis, skepticism, research -- all good. Catastophisers like Peter Schiff are actually quite unable to see the flaws in their own thinking and are well worth a block.

 

Here is a tiny bit from CML Pro, our research subscription service, that we sent out this Sunday -- different subject, but catastrophisers are always there.:

 

 

III. MARGIN DEBT
There is just no nice way to say this, and we owe it to you to be honest, the headlines that have been catastrophizing margin debt are either written by people that are looking to get web traffic for pay on advertisements, or they are written by journalists with no real background in finance.

This is the catastrophe chart:

margin_debt.PNG

 

The blue line is the S&P 500 and the redline is the level of margin debt. It looks obvious, right? We’re over margined and there is going to be a collapse. First, that indicator has been catastrophized before — in fact, in 1981 the NY Times warned of “weak investors” and the potential for a great fall. Here is the article lead, with a chart of the S&P 500 below it.

margindebt_NYT.PNG

 

Yeah, not exactly “pushed into a painful fall.” But, that was just a fun look back at a catastrophizing article. Here is the actual margin chart we should be looking at:

margindebt_marketcap.PNG

 

That is a chart, going back to 1980, of margin debt relative to the market cap of the Wilshire 5000 (loosely, we can call this “the stock market”). What we see is not that margin debt is growing unbounded, but rather that the underlying asset (the stock market) to debt is actually in a state of equilibrium. That doesn’t mean there won’t be a large stock drop — in fact, even this equilibrium level looks elevated to the past — but, it is not growing out of control.

If you really want catastrophe headlines, just read anything on the Business Insider, the “news agency” started by fraudster Henry Blodget (he was banned from the securities industry by the SEC and fined $4 million about 15 years ago so he started a clickbait news site and just sold it for $400 million and… missed revenue expectations that the buyer was betting on).

BIheadline.PNG

 

That was back in 2014. The great thing about this idea is that they can keep publishing, every few months (which they do), and eventually, what do you know, the market will go down and they will say, “ha! see! margin debt!.”

It’s worthwhile for us to keep an eye on this relative to market cap, but Barry Ritholtz said it best back in 2015 on Bloomberg:

bbheadline.PNG

 

And that was back in April of 2015 — so, yet another two-years of drum banging. Alright, hopefully we are past the idea that margin debt is a predictor of anything.

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1 minute ago, Noah Katz said:

 

Perhaps I'm succumbing to "the sky will fall" pronouncements of Peter Schiff et al, but what about the sovereign debt bomb finally exploding, i.e. precipitous loss of faith in fiat currency, financial market collapse, hyper-inflation, etc?

I'm not sure what you are saying but late 70's, culminating in 1980 we had hyper-inflation. Prime was 12.5%, inflation was 20%+.

At the time, there was a feeling that there was no longer a currency, and gold was the only safe asset..

1929 and 2008/2009 almost equal in terms of depth, and aftermath. (I wasn't around for 1929!)....if that is not a financial collapse, we have not seen anything worse....YET!

Yes, I have not seen the outcome of the "debt-bomb" because , so far, it has been contained, the explosion has not happened YET! That is the only one that I have not seen, nor has anyone else.

We didn't even have, or allow, debt until around the 1980's.

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1 minute ago, cuegis said:

I'm not sure what you are saying but late 70's, culminating in 1980 we had hyper-inflation. Prime was 12.5%, inflation was 20%+.

At the time, there was a feeling that there was no longer a currency, and gold was the only safe asset..

1929 and 2008/2009 almost equal in terms of depth, and aftermath. (I wasn't around for 1929!)....if that is not a financial collapse, we have not seen anything worse....YET!

Yes, I have not seen the outcome of the "debt-bomb" because , so far, it has been contained, the explosion has not happened YET! That is the only one that I have not seen, nor has anyone else.

We didn't even have, or allow, debt until around the 1980's.

 

Was it really a collapse? Where is the market now? What is the catastrophe? 

 

The fiat currency system will fail? Gold will be the only true currency? Really?

 

What catastrophe are we under right now? 

 

If you do truly feel that way, then, yes, surely leave the market, buy gold. Otherwise, it's just something to say (Peter Schiff). Remember, he said that the Dow Jones Industrial average would trade at the price of gold per ounce -- this was 2008.

 

Today the Dow is at 20,600.  Gold is 1,285. 

 

He never changes his tone. Is it possible that everyone n the world is right and he is wrong as opposed to the opposite?

 

I'm not very bullish right now, certainly see downside risk, but I simply see no catastrophe, other than our news has been hijacked by click bait.

 

Fuller analysis:

 

 

VALUATION
The market is definitely at a toppy valuation and bullish sentiment is definitely near all-time highs. First, we start with charts that cover valuations:

Our image is from Factset:

market16_3-2017.PNG

 

Back on December 31, the trailing 12-month P/E ratio was 17.9. Since this date, the price of the S&P 500 has increased by 6.9%, while the trailing 12-month EPS has decreased by 1.9%. Thus, both the increase in the “P” and the decrease in the “E” have driven the increase in the trailing 12-month P/E ratio to 19.5 today from 17.9 at the start of the year.
(Source: Factset)

And the real takeaway:

“The current trailing 12-month P/E ratio of 19.5 is above the three most recent historical averages: 5-year (15.9), 10- year (15.9), and 15-year (17.6).”

 

Conclusion: Any objective measure reads that the market’s valuation is high relative to its history.

TECHNICALS
We can look at other measures of valuation as well. For those that are technically minded:

market1_3-2017.PNG

 

The top chart is a measure called the “RSI.” Any number above 70 generally reads as “over bought.” We are sitting at 72.4.

The big chart is the S&P 500 — we leave that as the focal point of the analysis.

The third chart is the %R, which is a momentum indicator. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. We are at -22.45.

The fourth chart is the Stochastic Oscillator, which is another indicator of momentum where 20 is typically considered the oversold threshold and 80 is considered the overbought threshold. We are at 83.85.

Conclusion: All three technical momentum measures read that the market is currently over- bought.

SENTIMENT
Market sentiment, which is usually a contrarian indicator, is extremely high. As a contrarian indicator, the higher it is, the worse it looks for equities. In the chart below we can see both the elevated level today, but also the low back in October 2008, which 6—months later was the signal of beginning of our current bull market run.

market4_3-2017.PNG

 

In fact, according to Charlie Bilello of Pension Partners, “the % of bulls in the Investors Intelligence sentiment survey hit 63% this week, the highest since January 1987.”

It is worth noting that peaks in investor sentiment, if they do portend a market sell-off, can be up to 6-months early in the signal.

Conclusion: Investor sentiment is very bullish, at a level we haven’t seen in about thirty years.

VOLATILITY
Realized volatility has become a favorite headline for the mainstream media, but while the volatility has been extremely low, it has not been an indicator of poor returns.

market3_3-2017.PNG

 

This is also from Charlie Bilello. It shows the 15 lowest volatility years and that eleven of the fourteen previous showed the S&P 500 ending with positive returns.

Conclusion: Don’t read these headlines if they intend to remark on returns (not options), they are click bait and a waste of your time. There is no signal here, one way or the other.

DIVERGENCE
One of the worst things we can see from a market is when the indices rise because of a small number of mega caps and the rest of the market is actually drifting down. We aren’t quite there yet, but we do have a divergence.

market5_3-2017.PNG

 

The S&P 500, which is market cap weighted, is now diverging from the equal weighted S&P 500, and that’s not a great sign.

Conclusion: A divergence is forming and if it widens, it could be a sign of a weakening bull.

INTEREST RATES
Please read this carefully. Interest rates are at historic lows. The current rate environment is not the issue. The Federal Reserve just signaled that it would be raising rates soon, and it may be on a path to several rate hikes. It’s the several rate hikes part that is important, and here’s why:

market2_3-2017.PNG

 

Jesse Felder shared this chart from BofA Merrill Lynch. The chart shows us that, in general, once rates get high enough, we can be on some shaky ground. Most recently the tech boom and the housing crisis both ended with a series of rate hikes and ended up in recessions.

Conclusion: rates are at historic lows, but, if the rate hikes come fast and furious, they do tend to signal the end of a bull run, in recent history.

EARNINGS
The market rise is not irrational exuberance, rather it is a reflection of stronger earnings, stronger GDP growth, dropping jobless rates, and rising wages.

market6_3-2017.PNG

 

Focus on the yellow bars — those are earnings. We finally broke out of our earnings recession and are showing some nice growth, with forecasts for more. Some of that is a monster rebound in energy due to oil prices, but not all of it.

Conclusion: Earnings are growing and the earnings recession appears to be over. However, the market is rising faster than earnings.

GDP
We have been in a period of sustained GDP growth and while it has not sustained a growth level above 3%, we are well passed the doldrums of sub 1% growth.

market17_3-2017.PNG

 

Perhaps most importantly, we got this read from the Bureau of Economic Analysis (our emphasis added):

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending.

 

And now on to the critical issue of debt.

DEBT
The images we will share here come predominantly from the “QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT” published by the NY Fed.

First, the mainstream media can’t help but sell click bait about Auto loans and the impending disaster. I kid you not, almost every major publication has drawn a parallel between the auto loan bubble we are in now, to the housing bubble we were in back in 2007. This is totally preposterous.

market9_3-2017.PNG

 

Auto debt is exploding, but….

First: Auto loan debt is now at $1 trillion. Housing debt topped $12 trillion.

Second: Auto loan debt is fixed rate (non-adjustable), has an average date to maturity of about 5-years and an average amount in the $25,000 range. Housing debt was becoming substantially adjustable (non-fixed rates), had an average date to maturity of over 25 years and an average debt amount well in to the several hundreds of thousands of dollars.

To compare these two is nothing less than catastrophizing.

Catastrophizing is an irrational thought a lot of us have in believing that something is far worse than it actually is.

 

Catastrophizing can generally can take two forms. The first of these is making a catastrophe out of a situation.

 

Conclusion: Auto debt is high, but it is nothing even near to close to that of the housing debt we once saw.

Now, a lot more important images about debt:

Mortgages
Mortgage debt is rising, but is well below the levels we saw before the last recession.

market10_3-2017.PNG

 

This image not only shows the magnitude difference in the debt, but also the quality of the debt. The dark blue, yellow, and light gray colors are the sub-prime debt. The dark gray and blue bars are the prime or ‘Alt-A,’ debt.

Also, the median credit score for mortgages has been falling, but it’s still above the 750 high water mark.

market11_3-2017.PNG

 

We can also look at the trends in late payment mortgages:

market14_3-2017.PNG

 

We want to see the green line rising, which is loans moving from late to current, and the red line dropping, which is loans moving from 30-60 days late to 90 days late. We see both.

Conclusion: Mortgage debt is rising, but it’s still not at a scary level. Credit scores are dropping, but they too are not at a scary level. Do note the trends.

Broader Debt
We can also look beyond just mortgages and Auto loans.

market8_3-2017.PNG

 

Looking broadly at all installment debt (an installment debt is a loan that is repaid by the borrower in regular installments), loan delinquencies are pretty low and certainly well below the 15-year average.

Conclusion: We are not in a debt delinquency crisis.

We can also look at delinquent debt by type:

market12_3-2017.PNG

 

Conclusion: Credit card debt, mortgages, auto loans, and HE (home equity) debt balances over 90-days delinquent are dropping. But there may in fact be a massive wave of trouble coming in the next few years from student debt.

Finally, we can look at foreclosure and bankruptcy rates:

market15_3-2017.PNG

 

Conclusion: Bankruptcies are on the decline and have been for over half a decade. Foreclosures are generally trending lower.

Margin Debt
Margin debt is just below all-time highs in real terms. Here is a great chart:

 

The current level is at its record high. Note the inflation-adjusted version is just off its record high in April 2015. It’s hard to see in that chart above, but the percentage growth in margin debt is far outpacing the percentage growth in the S&P 500.

 

A good portion of that margin debt was a Fed fueled zero interest rate policy (ZIRP), but the recent rise is just a good old fashioned debt pile to buy stocks.

 

Conclusion: The data is not conclusive but there is circumstantial evidence that the retail public is partially fueling an equity boom with margin debt.

Or… there is this chart:

margindebt_marketcap.PNG

 

What we see is not that margin debt is growing unbounded, but rather that the underlying asset (the stock market) to debt is actually in a state of equilibrium.

NOW WHAT?
First of all, now you know what I know. You can use this data to come to any conclusion you feel comfortable with before I chime in. But, alas, I will chime in.

The market, broadly, has gone beyond toppy to generally overvalued. I don’t think it’s “bloody murder end of the world” over-valued, but yeah, it’s high, and sentiment is remarkably bullish (which is usually bad) while margin debt is at an all-time nominal high.

Now, some of that optimism is due to rising earnings, rising GDP, higher wages and dropping unemployment. More of it comes from rising home prices, which makes everyone “feel wealthier.” But, some of it is just speculation.

The market has risen by more than earnings dictate, which has led to this high valuation and overly bullish momentum and sentiment. We are not in a housing debt bubble (which is different than a housing price bubble), and comparing an Auto bubble to a housing bubble is laughable.

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  • Similar Content

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      Risk Disclosure 
      You should read the Characteristics and Risks of Standardized Options. 

      Past performance is not an indication of future results. 

      Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. 

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