Bullish 0DTE Bets – RIA

By Michael Lebowitz and Lance Roberts | March 7, 2023

0DTE options are speculative option trades that expire within a day of expiration. Furthermore, and very topical, the popularity of 0DTE options has accelerated immensely, accounting for over 50% of all options volume. Before the pre-pandemic era, 0DTE trading accounted for 5-10% of all options volume. Thus far, the interest is mainly for calls, i.e., bullish bets. While many 0DTE option trades are bullish, that may not always be the case. As we wrote in Turmoil Lurks Around the Corner, regardless of the objectives, 0DTE options have a similar feature as portfolio insurance; they can significantly intensify market moves.”

The graph below from SpotGamma sheds more light on 0DTE trades. It shows that most 0DTE trades are bullish. To get wonky- the delta of the underlying options rises as stock prices increase. Per SpotGamma: “whereas 0DTE is currently most impactful is where it seems 0DTE calls are being used to ‘buy the dips’ after large declines.” Such trades exaggerate upward moves. While everyone likes a good upward surge, nothing precludes 0DTE options traders from switching from bullish to bearish trades. In that case, turmoil may rear its ugly head.

, Bullish 0DTE Bets – RIA

What To Watch Today

Economy

  • Wholesale Inventories, January
  • Federal Reserve Chair Jerome Powell testifies before Senate Banking Committee

Earnings

, Bullish 0DTE Bets – RIA

Market Trading Update

The market rallied out of the gate yesterday morning and eclipsed the 20-DMA. However, it was unable to sustain that break into the afternoon. Importantly, the 100-DMA is now crossing above the 200-DMA, another bullish confirmation. While the economic and fundamental backdrop remains challenging, the market continues to ignore the “Elephant in the room” of the Federal Reserve continuing to tighten monetary policy.

, Bullish 0DTE Bets – RIA

Speaking of bullish technicals, Sentiment Trader posted a report yesterday showing market performance post “bear market lows.” If such is indeed the case. To wit:

“If we assume that October 12, 2022, was the birth of a new bull market, then by last week, the rally had lasted 95 trading days. We can use bull and bear market dates defined by Ned Davis Research to compare the price path during this stretch against all other nascent bull markets since 1928. By doing that, we can look at the highest- and lowest-correlated bull markets to see where the current one fits in and what the future returns looked like after similar behavior.

The chart below shows the current bull market in black versus the 15 highest-correlated ones dating back to 1928.”

, Bullish 0DTE Bets – RIA

What’s most important is what it meant for future returns. The table below shows S&P returns after the first 95 days of the most highly-correlated bull markets. Those returns were good, especially over the next six months, with all positive returns.

, Bullish 0DTE Bets – RIA

“Suppose a new bull market started last October. In that case, it has progressed in line with many of the more sustained bull markets in history, particularly since the 1950s. The first 95 trading days of the bull market (if that’s what this is) have a high correlation to the first 95 days of bull markets that showed a strong tendency to persist, with low drawdowns, at least over the next year. While a couple of those ultimately failed, the initial move off the low was compelling enough for buyers to continue to raise their bids for months afterward.”

Just something to consider.

, Bullish 0DTE Bets – RIA

REITs Trading at Discounts

S&P Global conducted recent research on the Net Asset Values (NAV) of U.S. equity REITs broken down by sector. In this case, the chart below shows the difference between the market cap of the aggregated REITs by sector and the reported value of the underlying properties. We caveat the research. Securing “good” valuations for properties is very difficult. Therefore, REITs are often delayed in reporting declines in property values. Investors, however, are not dumb and will often price in lower asset values before they are officially reported, resulting in price discounts to the NAV.

The first chart shows that only Casino and Communications REITs trade at a premium to their aggregate NAVs. Conversely, office REITs trade at the largest discounts. Further, the second table shows eight of the ten REITs trading at the largest discounts to NAVs are office REITs. Lastly, the third table shows the top ten REITs sorted by the premium to NAV.

, Bullish 0DTE Bets – RIA
, Bullish 0DTE Bets – RIA
, Bullish 0DTE Bets – RIA

Heikin Ashi Technical Analysis

Jim Colquitt uses Heikin Ashi, a not commonly used form of technical analysis, to analyze what may come next for the S&P 500. Per stock charts:

, Bullish 0DTE Bets – RIA

Here is Jim’s technical take on the S&P 500 as seen through the eyes of Heiken Ashi Analysis:

Note that the even though the S&P 500 Index registered a positive week, it still generated a “red candle” using the Heikin Ashi bars.  This is because the Heikin Ashi candles are focused on average price movements.  As such, despite a positive price week for the S&P 500 Index, the Heikin Ashi candles indicate that the price trend is still lower.

Additionally, note that typically before a reversal in price, the Heikin Ashi price bars will indicate this by having an “upper wick” or “upper shadow” the week or two prior to the reversal taking place.  I have noted how this has played out in the past using the black arrows.  This last week did not register a “upper wick/shadow” thus further suggesting that the trend is lower.

, Bullish 0DTE Bets – RIA

Powell Visits Capital Hill

Jerome Powell will testify to Congress today and Thursday. Likely, Powell will focus on the Fed’s plan to tackle inflation. Therefore to better prepare for the potential of volatile trading, the graph below from Brent Donnely sheds light on instances where Powell has been less hawkish.

Per Brent: Jerome Powell doesn’t know any more than you do about where the economy is headed. That’s why I have emphasized that markets should trade the data, not Powell. Here is the performance of equities around three big dovish Powell moments. The red bar is the day Powell spoke.

, Bullish 0DTE Bets – RIA

Tweet of the Day

, Bullish 0DTE Bets – RIA

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