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Monday, May 10, 2021
$ SPY and $ QQQ Market Neutral Structures
*Trading in financial markets carries risk and can result in loss of capital
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions
US stock markets CAPE ratio (Cyclically Adjusted Price/ Earnings) ratio now stands at one of the highest levels in the world. As an example, for SPX index, the ratio currently stands near 36.6 levels, 98% higher than its monthly readings since 1981. For Nasdaq Index, the ratio currently stands near 53 levels, again higher than its long term average. While these rich valuations are being supported by surplus liquidity on back of various fiscal & monetary policy measures, markets are also forward looking towards the recovery theme aspect of the US economy.
Going ahead, current rise in COVID – 19 cases across Asian countries & Indian subcontinent will likely keep markets on a jittery edge. The structures provide a convenient way to trade on the future 2 month directions on SPX & Nasdaq 100 Index using options of their respective ETF's. The structures are designed to be market neutral with client having the flexibility to choose from either of these based on his view of the expected market volatility.
Expected View & Return Profile
With the Yield Earners, there can be potential yields of 6.03% & 10.73% over the duration for the SPY & QQQ structures respectively. This is based on the view that both the indices will be range bound between the levels as mentioned in the table below. However, should the market turn out against the view & instead trend in a volatile manner, losses will start accumulating up to the potential max capped loss of - $43,975.
With Volatility Plays, there can be potential max profit $43,975 & $29,450 for SPY & QQQ structures respectively. These gains occur when indices break beyond the levels as mentioned below. The max loss over here is potentially limited to the initial debit cost for entering the structures: -$6,025 & -$8,050 for SPY & QQQ respectively.
|Structure||Leg 1 - Buy Put Strike||Leg 2 - Sell Put Strike||Leg 3 - Buy Call Strike||Leg 4 - Sell Call Strike|
|$ SPY Yield Earner||86%||91%||113%||108%|
|$ SPY Volatility Play||91%||86%||108%||113%|
|$ QQQ Yield Earner||86%||91%||113%||108%|
|$ QQQ Volatility Play||91%||86%||108%||113%|
Summary & Statistics
|Sr No||Structure||CMP considered||Duration - 2 Months | Expiry||Underlying Strategy||Expected Volatility Direction||Expected Trend Direction||Total Exposure - Each Leg ( in Lots)||Total IM + MM||Net Premium Recived/Paid||Yield ( As % of IM)||Max Profit (Capped)||Max Loss (Capped)||Suitability||Break Even Points||Max Profitability|
|1||SPY Yield Earner||$416.50||16th July,2021||Iron Condor||Low to Neutral||Neutral||25||$100,000||$6,025||6.03%||$6,025||$43,975||When the view is rangebound /sideways without expectations of any major movement||$377.59 & $ 425.41||Between the Break Even Points|
|2||SPY Volatility Play||$416.50||16th July,2021||Reverse Iron Condor||High||Neutral||25||-||$(6,025)||-||$43,975||$(6,025)||When the view is volatile with sharp movement expected across either sides of the markets||$377.59 & $ 425.41||Beyond Break Even Points|
|3||QQQ Yield Earner||$332.75||16th July,2021||Iron Condor||Low to Neutral||Neutral||25||$75,000||$8,050||10.73%||$8,050||$(29,450)||When the view is rangebound /sideways without expectations of any major movement||$296.61 & $363.39||Between the Break Even Points|
|4||QQQ Volatility Play||$332.75||16th July,2021||Reverse Iron Condor||High||Neutral||25||-||$(8,050)||-||$29,450||$(8,050)||When the view is volatile with sharp movement expected across either sides of the markets||$296.61 & $363.39||Beyond Break Even Points|
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data & Prices as of: 05/05/2021 – US Market Open
Arun Leslie John
Chief Market Analyst
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