The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.
The story then unfolds:
Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽
S&P500 is down 6.5% since the start of January.
Nasdaq is down over 10%, the Dow 6%.
Why do stocks go down when Treasury yields (i.e. interest rates) go up?
Especially tech stocks!
Thread 👇 🧵
The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.
The story then unfolds:
Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽
When you spend less, firms sell less stuff.
This in turn affects company earnings, and by extension their stock prices.
It’s just a way how investors value stocks.
Anticipating what the future cash flow of tech firms is worth today.
And the discount factor reflects interest rates in the economy.
As interest rates go ⬆️ the present value of future earnings goes 🔽
Remember that most tech stocks have very high expected future earnings.
And as a consequence extremely high valuations.
And it hasn't even raised them yet!
Why does that warrant such a big correction?
Sure, the Fed didn’t raise rates yet, but the bond market is adapting to *expectations* of 3 to 4 interest rate hikes this year.
Because as the economy overheats - higher exp. growth & higher inflation - the Fed raises it’s federal funds rate
(short-term interest rates basically)
This sends short-term T-yields ⬆️
(the 1-mo, 2-mo, 3-mo, 6-mo rates)
They expect short-term rates to fall in the future.
So they buy long-term bonds, thus pushing their price down.
(see this thread for an explanation of how this works)
https://t.co/Cd45dlta8K
6/ If there is greater demand for a bond, and its price goes\U0001f53cto, say, $1050, the current yield is 20/1050 = 1.9%
— Vuk Vukovic (@wolf_vukovic) November 15, 2021
If the price of a bond goes\U0001f53bdue to less demand, say to $920, the current yield jumps to 20/920 = 2.17%
Hence the inverted relationship btw bond yields & prices.
So we get an *inverted* yield curve - a self-perpetuating mechanism that sends signals to investors and at the same time drives reactions of market actors.
It becomes a self-fulfilling prophecy.
That's why keep an eye on the spread between the 2 year (& 3-month) yield to the 10 year yield.
Nothing, really.
It depends on the period you look at.
Stocks went down 40% of the time, up 60% of the time.
Coin-toss, really.
In this case, a 50bps rise in rates moved equities by 1 p.p.
Their logic is that higher rates are necessary due to a strong economy, and a strong economy implies better earnings.
Expect sector rotations during corrections: moving from tech to energy or industrials or banks.
Tech? Don’t exit, take some profits and keep holding
(if you have any profits left, that is!)
And also watch out for that yield curve inversion!
Follow me @wolf_vukovic for more similar stuff on finance, markets and investing.
More from All
MASTER THREAD on Short Strangles.
Curated the best tweets from the best traders who are exceptional at managing strangles.
• Positional Strangles
• Intraday Strangles
• Position Sizing
• How to do Adjustments
• Plenty of Examples
• When to avoid
• Exit Criteria
How to sell Strangles in weekly expiry as explained by boss himself. @Mitesh_Engr
• When to sell
• How to do Adjustments
• Exit
Beautiful explanation on positional option selling by @Mitesh_Engr
Sir on how to sell low premium strangles yourself without paying anyone. This is a free mini course in
1st Live example of managing a strangle by Mitesh Sir. @Mitesh_Engr
• Sold Strangles 20% cap used
• Added 20% cap more when in profit
• Booked profitable leg and rolled up
• Kept rolling up profitable leg
• Booked loss in calls
• Sold only
2nd example by @Mitesh_Engr Sir on converting a directional trade into strangles. Option Sellers can use this for consistent profit.
• Identified a reversal and sold puts
• Puts decayed a lot
• When achieved 2% profit through puts then sold
Curated the best tweets from the best traders who are exceptional at managing strangles.
• Positional Strangles
• Intraday Strangles
• Position Sizing
• How to do Adjustments
• Plenty of Examples
• When to avoid
• Exit Criteria
How to sell Strangles in weekly expiry as explained by boss himself. @Mitesh_Engr
• When to sell
• How to do Adjustments
• Exit
1. Let's start option selling learning.
— Mitesh Patel (@Mitesh_Engr) February 10, 2019
Strangle selling. ( I am doing mostly in weekly Bank Nifty)
When to sell? When VIX is below 15
Assume spot is at 27500
Sell 27100 PE & 27900 CE
say premium for both 50-50
If bank nifty will move in narrow range u will get profit from both.
Beautiful explanation on positional option selling by @Mitesh_Engr
Sir on how to sell low premium strangles yourself without paying anyone. This is a free mini course in
Few are selling 20-25 Rs positional option selling course.
— Mitesh Patel (@Mitesh_Engr) November 3, 2019
Nothing big deal in that.
For selling weekly option just identify last week low and high.
Now from that low and high keep 1-1.5% distance from strike.
And sell option on both side.
1/n
1st Live example of managing a strangle by Mitesh Sir. @Mitesh_Engr
• Sold Strangles 20% cap used
• Added 20% cap more when in profit
• Booked profitable leg and rolled up
• Kept rolling up profitable leg
• Booked loss in calls
• Sold only
Sold 29200 put and 30500 call
— Mitesh Patel (@Mitesh_Engr) April 12, 2019
Used 20% capital@44 each
2nd example by @Mitesh_Engr Sir on converting a directional trade into strangles. Option Sellers can use this for consistent profit.
• Identified a reversal and sold puts
• Puts decayed a lot
• When achieved 2% profit through puts then sold
Already giving more than 2% return in a week. Now I will prefer to sell 32500 call at 74 to make it strangle in equal ratio.
— Mitesh Patel (@Mitesh_Engr) February 7, 2020
To all. This is free learning for you. How to play option to make consistent return.
Stay tuned and learn it here free of cost. https://t.co/7J7LC86oW0
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