Samwise Quick Reference Handbook
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Hi Sam,
Apologies, but I didn’t mentally make the connection on why it wouldn’t be remotely surprising if QQQ suddenly drops to $400. What scenario is this in reference to? Is this in reference to the potential bear market risk? Feel free to point me / redirect me to any links / past daily briefings.
Thanks!
So here is how to sort of think about this. Let’s suppose that it’s already written stone that we’re in a bear market. Let’s suppose ahead of time it was already determined from the get-go that the sell off that started in February was really the beginning of a 13-month bear market.
If that were the case, nothing that we’ve seen so far would have been any different.
This rebound that we’ve seen since April 7th would happen bear market or no bear market
Because the QQQ was as oversold as it was, because of capitulation and because of all of the other reasons we pointed out, this rebound we’re seeing right now was inevitable. Regardless of the long-term outlook, it was going to happen.
It is inevitable whether we’re in a bear market or whether the market is recovering to its highs.
Since that is the case, there’s no real way to tell whether what we’re seeing right now is really just a bear market rally or whether it’s the real deal.
We have different markers that tell us which is more likely
But we don’t know with a certainty. As the QQQ claims we could start to slowly rule this out as a possibility.
For example, the fact that the QQQ has retraced more than 50% of its losses is a big indication that this is not a bear market rally.
The fact that the QQQ retraced the entire second leg down is also an indication. The biggest indication would be if the QQQ goes back above 500.
That not withstanding this could still very much be a bear market rally or even a massive retest of the highs at $540.
Even though it is less likely given how far this rally has come, there is still a distinct possibility — larger than usual — that this could end up being a bear market rally
Because things were always going to play out the way they are now, regardless of whether this is a bear market rally or not, you have to plan for the potential possibility that this is just a bear market rally. Hedging is the way to do that.
No one should be surprised if things roll over as we are stressing that this is a distinct possibility. It is why we are heavily hedged in Arryn. Far more than we usually would be.
Thanks Sam!
This part made it really click. Appreciate your detailed responses as always 🙂
Hi Sam,
Typo? Did you mean no lines of resistance along the way?
If not, what resistance levels are you referring to? I’m surprised you haven’t called out $130 as a historical resistance level (I remember NVDA always battling with $130 in the past). Does that not apply anymore due to the big downward move it’s taken?
Thanks!
It was a typo. I meant to include the word “minor.” There are some minor resistance lines but nothing as significant as 115 & 122.
Hi Sam,
Question #1
Are we thinking of buying back the same expiration? Or pushing back a month to August expiration for additional margin of safety?
Question #2
If I recall correctly we opened these July spreads when IV was elevated. Will buying them back through these trades mean the appreciation for the position will be dampened as the IV is lowered compared to then? I’m assuming the goal for re-positioning the spreads in this scenario is to reduce existential risk?
Thanks!
So that is always a very tricky thing. I’m going to have to carefully assess the overall situation when and if we’re in that situation.
Here’s what makes this complicated. Because we’re dealing with spreads, sometimes too much time is a bad thing. Let me give you an example of how.
Let’s suppose we roll forward to August to buy more time. After we do this, Nvidia bottoms and then surges back up to $122 a share. The market catches a bid and we get a full blown breakout.
Nvidia pushes through its $122 resistance level and begins to march up toward $130 a share. It runs into some resistance, pulls back but eventually it continues on higher and we have a strong month of June where Nvidia is now trading at $150 in early July.
In that situation, we’d want to be in the $125-$135 July spread. The extra month means we’ll have a lower priced spread.
If we’re fully in the month with 2-3 weeks remaining until expiration, that spread will be worth almost full value. With another month to go, it will be a lot cheaper because there is a stronger possibility of Nvidia pulling back and falling out of the money.
So we have to time it all out very careful. We’re going to want enough time to clearly find ourselves fully in the money as we approach expiration.
What I’d rather do is reduce the spread strikes. If we can get those down to $115-$125, we’ll be sitting pretty.
But we’ll have to wait and assess the overall situation at the time. For now, our first move will be to close out the spreads if Nvidia manages to push deeply overbought.
So we bought the spreads at $3.00. They have a maximum value of $10.00. IV has no role to play in that at all. So that won’t really dampen the returns. They did cost a little more due to the IV at the time. So they played some role in cost. But not in the eventual full value. They were trading fairly close to where they should have been trading given when we bought them.
If we close them at more than $3.00 and buy them back at $2.50, then we have a potential 300% return in the works if held to expiration.
And our goal right now is to hold these into expiration. we want to close them out at $10.00. That’s the goal at the moment.
Hence why we want to reduce the strikes through trading. For example, suppose we sell them at $3.30-$3.40 a contract with Nvidia at $122 a share. If we do that, the goal would be to buy back the $120-$130 July spread at the same price at which we sold the $125-$135 spread. So that would be to buy them back at $3.30 to $3.40.
If we can extend a week or so on expiration, we might do that.
But that’s the goal here. By selling at $122 and buying back at $116, we’re essentially reducing our strikes by $5.00.
If we can do that a second time, we can reduce the strikes by $10.00. That would be very significant. At $115 – $125, I think we have a very high probability of seeing them close in the money.