History often repeats itself and February lived up to its historical tendencies by closing with major indexes losing across the board.

The 10-year U.S. Treasury yield and dollar both held at higher levels, putting pressure on the equities market.

Finding a trading niche that can navigate within the stock market volatility has become a priority of retail traders.

Compound setup on Tesla in play midweek

One of the pro traders at Simpler Trading continues to use a trade setup that proved successful through the volatility of last year.

The compound butterfly setup is a go-to strategy for Allison Ostrander, Director of Risk Tolerance at Simpler Trading.

“This is a great strategy to consider when you may anticipate a volatile move without having to be correct on the direction,” Allison said.

This week Allison targeted Tesla, Inc. (TSLA) where the stock price of the company has consolidated near the $200 mark. Tesla closed down by .92% at $205.71 on Tuesday.

Tesla was caught up in the volatility of the day where the Dow closed at 32,656.70 points to fall .71% (dropping 232.39 points on the day). The Nasdaq dropped to 11,455.54 points for a .10% tumble while the S&P 500 stumbled by .30% to 3,970.15 points.

Depending on which way the stock is moving, the $200 price level has been support or resistance in the past couple of years for Tesla.

“This consolidation is allowing things like momentum to get a reset off of exhaustion and we’re building into a daily squeeze,” Allison said. “We know that squeezes can give a greater than expected move when they start to fire.”

Investor day may create needed volatility

Allison has been tracking a Tesla event that could create enough volatility to send the stock breaking out of the squeeze.

The Tesla investor day is Wednesday. This is an information event sponsored by the company where senior management officials share insight into the company’s financial health, vision, and future with shareholders, media, analysts, and potential investors. 

What information comes out of the meeting is unknown, but is likely to have an effect on the stock price.

“I don’t know which way this is going to move, but there is a good possibility we will get some volatility,” Allison said.

Her setup to trade through the event is the compound butterfly.

The idea is to combine two debit broken wing butterfly setups – one on the put side and one on the call side. Allison is watching for the volatility of the event to cause the Tesla stock price to move within the anticipated range for the week or possibly a bigger move.

“If we get the volatile move to where we go toward our short strike it allows for profit,” Allison said. “But it gives us the forgiveness factor that if it’s a bigger move than anticipated due to the squeeze… it can still allow for a profit.”

This provides a setup to target volatility however price moves.

“I think that this could be a contender strategy to keep in mind playing through the Wednesday announcement and into the end of the week,” Allison said.

Bullish targets ahead on S&P 500 futures?

History repeating itself with February closing with losses across the board in the stock market is nothing new for veteran trader Neil Yeager, Futures and Training Room Content Provider at Simpler Trading.

Neil has watched over the last two weeks as the E-Mini S&P 500 (ES) index futures dropped more than 250 points. The index is also down from its last high of 4,170 in October.

The last day of any month is typically bearish, but Neil knows the first part of the new month can lean bullish. This is often spurred by new money coming into the market that provides a boost in price.

Based on past levels on the ES Neil has established some bullish targets for this week

“I’m going to look for this to uptick a little bit this week,” Neil said.

But he doesn’t expect the bullish sentiment to last beyond Friday.

“After that it’s my intention to flip back around and be bearish again,” Neil said.

‘Magnetic’ price level spurs longer-term setups

The stock market has experienced a level of consolidation where price stays within a range for some time.

On the S&P 500 (SPX), that consolidation has fluctuated with a mean near the 4,000 level. This fluctuation is almost “magnetic” with price moving up or down toward this mark.

Within this trading range, Henry Gambell, Senior Managing Director of Options at Simpler Trading, is taking into account bullish sentiment being revealed through technical chart analysis.

He is putting together a longer-term trade setup where he can look back in a few weeks and see if this “magnetic” 4,000 level on the SPX chart is still holding and if his trade setups were profitable.

“A bigger directional move could occur,” Henry said. “Obviously the market is not going to trade in a flat line.”

He is looking out as far as the next options expiration on March 17 which is the first quarterly witching in 2023.

“It wouldn’t surprise me to be sitting there on that Friday somewhere around 4,000,” Henry said.

Along the way he is looking at trade setups using an unbalanced butterfly or a wide iron butterfly to take a trade that far out. These setups are designed to balance against price movement up or down and can be adjusted as expiration nears.

Dollar, yields weigh heavily against equities

As March arrives after a February thud, Henry is keeping a close eye on 10-year U.S. Treasury yields and the U.S. Dollar index.

How these affect the stock market is something traders should watch.

“Equities have really been held hostage to this bigger macro theme and with the rising dollar, rising yields, it has put pressure on things,” Henry said.

Treasury yields during the trading session today spiked to the highest level since November before leveling off on the day.

To follow the team at Simpler Trading into March, check out the live-trading schedule in the online community.