01 Market Assessment — Reading the Market into 3 Tags

Educational use only — not investment advice. See full disclaimer in README.md.

The goal of this step is narrow and concrete: turn whatever the market is doing into three tags that feed the strategy selector. You are not trying to predict the future. You are classifying the present into a few buckets so the system can do its job.

Output of this file: Direction = { Bullish · Bearish · Neutral/Range · No view } (+ strength: strong/weak) Volatility = { Low IVR <30 · Mid 30–50 · High >50 · Very high >70 } (+ rising/falling) Catalyst = { None · Earnings · Macro (FOMC/CPI/Jobs/PCE) · Other binary }

Do this at two levels: (A) the broad market (SPX/SPY, QQQ — sets the weather) and then (B) the specific underlying you’re considering. A bullish single stock inside a falling market is a different trade than the same stock in a rising one.

TAG 1 · Direction — “Where is price going, or not going?”

You’re choosing between four states. Use a top-down checklist, not a feeling. No single indicator decides — look for confluence.

The directional read (run on SPY/QQQ first, then your underlying)

Signal Bullish Bearish Neutral / Range
Trend (price vs 50 & 200-day MA) Above both, 50 > 200 Below both, 50 < 200 Tangled / flat MAs
Slope of the 20/50 MA Rising Falling Flat
Higher highs / higher lows? HH + HL LH + LL Choppy, no pattern
Where in the range? Breaking out up Breaking down Mid-range, bounded by clear S/R
Market breadth (adv/decl, % above 50-DMA) Broad, healthy Deteriorating Mixed
Relative strength (stock vs SPY) Outperforming Underperforming In line

How to assign the tag:

  • Strong bullish/bearish: 4+ signals agree and price is trending cleanly. → directional debit/credit structures are justified.
  • Weak bullish/bearish (a “lean”): 2–3 signals agree but it’s choppy. → prefer defined-risk, forgiving structures (credit spreads that win even if you’re only roughly right) over outright long options.
  • Neutral / range: price is rangebound between identifiable support and resistance, MAs flat. → premium-selling, market-neutral structures.
  • No view: you genuinely can’t tell. → either trade pure-volatility structures (Tag 2 decides) or don’t trade. “No view” is honest and common.

Key professional habit: map support and resistance explicitly. Even a directional trade needs to know “where am I wrong?” Your short strikes (selling) or your stop level (buying) hang off these lines. Mark the nearest meaningful S/R above and below current price before you do anything else.

Quick directional questions to answer

  • [ ] Is the broad market (SPY/QQQ) trending or ranging? Up or down?
  • [ ] Is my underlying with or against the market?
  • [ ] Where are the nearest support and resistance? How far (in %) is each?
  • [ ] If I’m leaning directional — is the move just starting (good) or already extended (chase risk)?
  • [ ] What invalidates this read? (a close below X / above Y)

TAG 2 · Volatility — “Is premium cheap or rich?”

This is the tag most beginners ignore and most professionals lead with. It decides whether you should be a net buyer or net seller of options, which often matters more than getting direction exactly right.

The single number: IV Rank (IVR)

IV Rank tells you where current implied volatility sits relative to its own range over the past year (0 = the year’s lowest IV, 100 = the year’s highest).

IV Rank = (Current IV − 52-week Low IV) / (52-week High IV − 52-week Low IV) × 100

Most platforms (thinkorswim, Tastytrade, IBKR, etc.) display IVR directly (barchart.com is a free alternative — see ref-data-and-news-sources.md). If yours doesn’t, IV Percentile (the % of days in the past year IV was below today’s) is an acceptable substitute — see ref-greeks-iv-mechanics.md §6 for the difference.

IVR Regime What it means Your bias
< 30 Low Options are cheap vs their own history BUY premium — debit spreads, long options, calendars, backspreads
30–50 Neutral Middling Either side; let direction/catalyst decide
> 50 High Options are expensive SELL premium — credit spreads, iron condors, CSPs
> 70 Very high Fear/stress priced in SELL, but SIZE DOWN. High IVR usually means something scary is happening; the easy premium comes with fat tails

Also note: the direction of vol and the context

  • [ ] Is IV rising or falling? Rising IV helps long-vega (buyers), hurts short-vega (sellers). Falling IV (mean-reverting after a spike) is the premium-seller’s tailwind.
  • [ ] VIX level & trend — VIX is the 30-day implied vol of SPX; it’s the market’s fear gauge. Sub-15 = complacent/low-vol regime (premium selling pays little; favor buying or stay small). 20+ = elevated. 30+ = stress/panic (premium is rich but realized moves are violent — size way down). See VIX notes in strat-volatility-event.md.
  • [ ] VIX term structure — normally upward-sloping (contango). When it inverts (front month > later months = backwardation), the market expects near-term turmoil; a classic sign to reduce risk, not add short premium.
  • [ ] Single-name vs index — a stock can have high IVR (e.g., into earnings) while the index is calm, and vice versa. Always check IVR on the specific underlying you’ll trade.

The golden rule, restated: High IVR → be the house, sell premium, profit from decay + IV reverting down. Low IVR → buy premium, get leverage cheaply, leave room for IV to expand. Mid → defer to direction and catalyst.

TAG 3 · Catalyst — “Is there a known event in play?”

A scheduled binary event changes everything about strikes, sizing, and even whether to trade. Always check.

The catalyst checklist

  • [ ] Earnings — when does the underlying (and its key peers/suppliers) report? IV ramps into earnings and crushes immediately after. This is its own discipline → strat-volatility-event.md. Rule: never hold a short-premium, undefined-risk trade through earnings unless that is the strategy.
  • [ ] Macro — FOMC decision, CPI, PCE, jobs report (NFP), GDP. These move the whole market. Index IV often elevates into them and relaxes after. → 06-playbooks.md has FOMC/CPI playbooks.
  • [ ] Other binary — FDA decisions, drug trials, product launches, legal rulings, major guidance/investor days, index rebalancing. Single-stock land mines.
  • [ ] Ex-dividend dates — matter for early-assignment risk on short ITM calls (American-style names). Check before selling calls near a dividend.

How the catalyst tag changes your action

Catalyst state Effect on strategy choice
None (clear runway) Standard selection — the matrix applies cleanly.
Earnings ahead Either a defined-risk vol play (long straddle/strangle if you expect a move > priced-in; iron condor / calendar to harvest the crush) or sit out and trade it after the crush. Compute the expected move (≈ ATM straddle price) first.
Macro ahead Reduce size; prefer defined risk; consider waiting until after the print when uncertainty resolves and IV settles.
Holding through an event you didn’t plan for Decide deliberately: close, hedge, or accept the binary. Don’t sleepwalk into it.

Putting it together — the assessment worksheet

Copy this into your journal each morning and fill it in:

DATE: __________

— BROAD MARKET (SPY / QQQ) —
Trend:        [ up / down / sideways ]   vs 50DMA: __  vs 200DMA: __
VIX:          ____   ( rising / falling )   Term structure: [ contango / inverted ]
Broad regime: [ risk-on / risk-off / mixed ]

— UNDERLYING: __________ —
TAG 1 Direction:  [ bullish / bearish / neutral / no view ]   strength: [ strong / weak ]
   Nearest support: ____   resistance: ____   "I'm wrong if": __________
TAG 2 Volatility: IVR = ____  → [ low / mid / high / very high ]   IV [ rising / falling ]
TAG 3 Catalyst:   [ none / earnings on __ / macro: __ / other: __ ]   Expected move: ±__%

→ THREE TAGS:  [ ________ ] · [ ________ ] · [ ________ ]
→ Proceed to 02-strategy-selector.md

Worked example

Morning of a quiet week, looking at SPY. SPY is above its 50- and 200-day MAs, making higher lows, breadth healthy → Direction: bullish (moderate). VIX is 14 and flat, SPY IVR is 22 → Volatility: low, falling. No FOMC, no CPI this week, SPY has no “earnings” → Catalyst: none.

Tags: Bullish · Low IVR · No catalyst. → The selector will steer toward buying directional premium (low IVR favors debit structures): e.g., a bull call (debit) spread or, with strong conviction, a long call / PMCC — rather than selling a bull put spread (which low IVR makes stingy). That’s the whole point: the tags did the narrowing for you.

Contrast: same bullish lean, but SPY IVR is 65 and VIX 26 after a selloff. Tags: Bullish · High IVR · None. Now the selector flips to selling premium into that bullish lean — a bull put (credit) spread or cash-secured put — collecting rich premium and benefiting as IV reverts down. Same direction, opposite structure, because Tag 2 changed.

Next: 07-opportunity-selection.md — pick which underlying(s) to trade, then 02-strategy-selector.md to feed your three tags into the matrix.