How To Profit From Market Fear & Greed

This page is converted from the PPT of My Zoom lecture at Fudan alumni investment group on July 30, 2021.

Lecture Youtube Video link: https://www.youtube.com/watch?v=07C6WwRis1Y

How To Profit From Market Fear & Greed

  • Fear & Greed Measurement
  • Profit from stock market fear
  • Profit from stock market greed


Stock Market Fear & Greed

  • Warren Buffet’s famous saying:
    Be fearful when others are greedy
    Be greedy when others are fearful
  • Problem: Hard to execute well, Human Nature:
    Sell when majority are fearful.
    Buy when majority are greedy.
  • Solution:
    Find math measurement of Fear and Greed.
    Trade with numbers, not with emotions.


Fear & Greed Measurement


FGI calculation is based on six factors:
@ Market Momentum @ Junk Bond Demand @ Market Volatility
@ Safe Haven Demand @ Put & Call Options @ Stock Price Strength


  • 2018/12/24 Market Bottom: FGI=3


Stock Market bottomed on the exact the same day FGI bottomed
2018/12/24 FGI has an extremely low reading of 3


  • 2020/3/13 Near Bottom: FGI=2


2020/3/13 FGI has an extremely  low reading of 2.
Stock Market bottomed on 2020/3/23 when FED Unlimited QE is announced


Options


Options: BTO or STO


BTO = Buy To Open, STC = Sell To Close
STO = Sell To Open, BTC = Buy To Close


Options: ITM OTM


ITM=In The Money,  OTM=Out of The Money
ATM=At The Money, NTM=Near The Money


Option Premium

 


Fear & Greed Measurement



Sell Puts

  • Sell ITM/ATM/NTM Puts:
    Try to get stocks
  • Sell OTM Puts:
    Try to earn stock market “rent”
  • Sell Deep OTM Puts:
    Try to earn stock market “rent”

Key: how to choose Strike Prices relative to the current Stock Price


Sell NTM Puts: RBLX

RBLX stock price range on 3/16: $73 – $78
Sell Put Strike: $70 (Near The Money NTM Put)

If RBLX stock moves up and on 4/16 closed above $70,
We will earn $8.18/share with
100% cash commitment of $70-$8.18=$61.82/share $61,820 for 10 contracts.

ROI(return on investment): 8.18/61.82 = 13% in one month.
13% compound for 12 months 1.1312 = 4.33.
Annual ROI: 333% (Power of compounding!!! not 13%x12 = 156%)

If RBLX stock moves down and on 4/16 closed below $70,
we must buy RBLX at $70/share. We still keep the sell put premium of $8.18/share.
Actual stock acquisition cost: $70-$8.18=$61.82/share.

Actual Result: On 4/16 RBLX closed at $75.85

My target RBLX buy price is $60. I repeatedly sold similar RBLX puts.
I sell NTM puts often. The goal is to get stock shares at discount (buy near $61 instead of at $73).


Sell OTM Puts: TSLA

TSLA stock price range on 12/09: $588 – $654
Sell Put Strike: $500 (Out of The Money OTM Put)

If TSLA stock moves up and on 12/31 closed above $500,
we will earn $18.9/share with
100% cash commitment of $500-$18.9=$481.1/share $288,660 for 6 contracts.

ROI: 18.9/481.1 = 3.9% in 22 days or 5.3% in a month.
5.3% compound for 12 months 1.05312 = 1.86
Annual ROI: 86%

If TSLA stock moves down and on 12/31 closed below $500,
we must buy TSLA at $500/share. We still keep the sell put premium of $18.9/share.
Actual stock acquisition cost: $500-$18.9=$481.1/share.

Actual Result: On 12/31 TSLA closed at $705.67

TSLA is one of my favorite stocks to sell puts. I sold a lot of puts in TSLA.

I sell OTM put often. The goal is to collect stock market “rent”.


Sell Deep OTM Puts: AMC

AMC stock price range on 05/28: $24 – $36
Sell Put Strike: $10 (Deep OTM Put)

If AMC stock moves up and on 6/18 closed above $10,
we will earn $0.37/share with
100% cash commitment of $10-$0.37=$9.63/share $51,039 for 53 contracts.

ROI: 0.37/9.63 = 3.8% in 20 days or 5.7% in a month.
5.7% compound for 12 months 1.05712 = 1.94. Annual ROI: 94%.

If AMC stock moves down and on 6/18 closed below $10,
we must buy AMC at $10/share. We still keep the sell put premium of $0.37/share.
Actual stock acquisition cost: $10-$0.37=$9.63/share.

Actual Result: On 6/18 AMC closed at $59.26

AMC is not my typical want to buy stock, but the probability of making money is so high I still do such Deep OTM sell put.
Good short-term sell deep OTM put is hard to find.
But I do a lot of medium-term deep OTM sell puts for solid companies.
The goal is to collect stock market “rent”.


Risks of Selling Puts

TD Ameritrade Thinkorswim software can show the probability OTM for each sell put strike.


Risks of Selling Puts

  • Stock in strong downtrend
    Do not sell puts at the beginning of a strong downtrend.
    Best to sell puts at the end of a downtrend.

  • Stock has signs of big drops
  • Do not sell puts when a stock has signs of big drops

  • Sector rotations
  • Do not sell puts for stocks whose sector is at the beginning of sector rotation out.
    Best to sell puts at the end of a sector rotation out.

  • Market in intermediate corrections
    Do not sell puts at the beginning of a market intermediate correction.
    Best to sell puts at the end of a market correction.

    FGI and Equity Put Call Ratio are good indicators for intermediate corrections. We have over 40 market intermediate correction indicators generated from our 6A data.

  • Stock Assignment Risks:
    Very high risks for people who like to sell a large number of put spreads

Stock price can go to zero, you may end up lose a lot money if the stock price goes to zero! Select solid companies to do sell put is very important!
Use 100% cash backup your sell put. Do not use margins.


Megapro 6A System

Megapro 6A financial data platform:

* TA = Technical Analysis
* MA = Money Flow Analysis
* EA = Event Analysis
* PA = Political/Policy Analysis
* FA = Fundamental Analysis
* SA = Sentiment Analysis

We pioneered the 6A investment system. We analyze the financial market from six diversified areas. We collect, process, and use the 6A data to generate trading picks and trading signals. We have built a scalable and reliable big data database and a powerful, robust computing farm to processing billions of data each month.


6A Data Example: Money Flows

* Stock Money Flow
* Options Money Flow
* Block Trades
* ETF Net Flow
* Darkpool Flow
* Fund Managers’ Cash Level
* Hedge Fund/Institution Flow
* Insider Trades
* Corporate Buybacks
* Inverse ETF Flow
* Margin Debt
* Fed Money Supply
* Fed QE Asset Balances

These money flow data and other 6A data will help us to determine if an intermediate market correction will arrive soon or has started. This is very important to avoid big losses in stock market trades.


Sell Put Stop loss

  • Close the Sell Put position before it expires
  • Let stocks be assigned
    If TSLA stock moves down and on 12/31 closed below $500,
    we must buy TSLA at $500/share. We still keep the sell put premium $18.9/share.
    Actual stock acquisition cost: $500-$18.9=$481.1/share.
    Once we were assigned TSLA shares we can start to sell Covered Calls to add a new way to collect rent.
  • Roll sell put options

  • NVDA price range on 3/16: $524-$540
    3/19 $560 sell put is under water.As a stop loss trade, I bought back the 3/16 $560 put back at $25.87/share, at the same time I sold a new 4/16 $540 put for $27.67/share. Didn’t pay anything, but received $1.8/share.Actual result: on 4/16 NVDA closed at $636
    NVDA had a 4 to 1 split on 2021/07/20
  • Choose to roll NVDA sell put because I have other NVDA positions.


Sell Covered Calls

  • Must own stock shares to sell Covered Call
    100 shares can sell 1 contract of CallSell OTM Covered Calls:
    Try to earn stock market “rent”.
    Keep stock shares as long term holding
  • Normal market: Sell short term calls
  • Pullback market: Sell longer term Calls if you want to keep your stocks for the long term


Sell Covered Calls: WISH

WISH stock price range on 7/15: $9.46 – $10.37, Average=9.92
Sell CC Strike: $12.5 (OTM CC)

If WISH stock moves down and on 8/6 closed below $12.5,
I will earn $0.4/share with
ROI: 0.4/9.92 = 4% in 20 days or 6% in a month.
6% compound for 12 months 1.0612 = 2.01. Annual ROI: 101%

If WISH stock moves up and on 8/6 closed above $12.5,
I must sell my WISH to the call buyer for $12.5 a share.
My WISH shares costs are well below $12.5/share so there is no loss for me.

On 7/22, the sell CC made 62.5% profit so I closed it at 0.15/share.
On 7/23, I made another sell CC again at 0.40/share.

I sell OTM CC often. The goal is to collect stock market “rent”.


Risks of Selling Covered Calls

TD Ameritrade Thinkorswim software can show the probability OTM for each sell call strike.


Risks of Selling Covered Calls

  • Stock has signs of big drops
    We may loose big for stocks that we are holding.
  • Market in intermediate correction
    We may loose big for stocks that we are holding.
  • Stock Assignment Risks:
    Very high risks for people who like to sell a large number of call spreads
  • Stock in strong uptrend
    We may miss big gains when the stock has a big up move.
    Do not sell covered calls when the stock is in a strong uptrend.
  • Stock has signs of big rises
    We may miss big gains when the stock has a big up move.
    Do not sell covered calls when the stock has signs of big rises.


Sell Covered Call stop loss

  • Close the Sell Call position before it expires
  • Let stocks be called away
    If WISH stock moves up and on 8/6 closed above $12.5,
    I must sell my WISH to the call buyer for $12.5 a share.
    My WISH shares costs are well below $12.5/share so there is no loss for me.
  • Roll Sell Covered Calls
    Roll Covered Call is similar to Roll Sell Put.
    Roll out Sell Put you try to lower the strike price.
    Roll out Covered Call you try to raise the strike price.

For the stock I really want to hold for the long term, I always roll out the sold Covered Call. Do not let my favorite stocks be called away.


Sell Puts vs Sell CCs

  • Sell Puts: profit from market fears
    Sell CCs: profit from market greed
  • Sell Puts: best in the uptrend
    Sell CCs: best in the downtrend
    US has much more bull markets than bear markets.
    I sell puts much more often than I sell CCs.
  • Sell puts does not need to hold stocks, just need cash.
    Sell CCs need to hold stocks, stocks have downtrend risks
  • For stocks I really like, I often do both sell OTM puts and sell OTM CCs at the same time. Earn “rents” at the double speed. One is guaranteed to win.


One Stock: 4 Ways Trading

  • Stock shares (long term)
  • LEAP Calls (long term)
  • Sell Puts (short term)
  • Sell Covered Calls (short term)

For good stocks and ETFs I found, I often start with sell puts trying to get shares at discount. If I do get shares from sell puts then I will start to sell covered calls to lower my stock costs. At the same time, I may continue to sell puts to add more stock shares at discount to slowly build a decent position in a stock I really like.

For a list of handpicked ETFs and stocks by me, please check out:
Top Sectors and Themes and Their Leading Stocks