Skip to main content

Morning Update

Yesterday the S&P 500 sold off over 1% and the VIX also sold off over 4%. Typically for a 1% down move in the S&P 500 the VIX will move up by 4%, so yesterday’s price action was very atypical and is a bullish indicator. The VIX moves up when the S&P moves down because traders bid up the cost of out of the money puts in order to protect their portfolios from further declines. Yesterday we saw traders doing the opposite: selling puts at levels they were willing to get long the market. The biggest trade of the day in SPY options was the sale of 48,000 Nov. 136 puts for $0.53 with SPY at 138.75. This trade will profit as long as SPY is above 135.47 (2.4% lower) at November expiration, which is in 8 days. If SPY is lower than 136 then the trader will be put to 4.8 million shares of SPY at 136, but regardless the trader will keep the $0.53 in premium collected.

For people who want to begin buying into this sell off selling puts is a good way to go because you can effectively get paid to lock in a price you are willing to buy at. However, selling puts means that you have all of the risk on the downside as a long stock position so you must be comfortable with the risks of owning the stock at the strike price. For people trying to pick a bottom in the S&P 500 but who don’t want to take delivery of the stock I recommend turning this trade into a put spread by buying a deep out of the money put as a hedge.

The case for keeping risk fixed and portfolios hedged is this chart, which overlays the price action around the 1987 crash with today’s market.

Though this doesn't necessarily mean the market will crash today, it is important to remember that it could, and does so unpredictably. We are currently cautiously long the market with tightly hedged positions and are closely monitoring the S&p 500's price action in the vicinity of the 200-day moving average.

Ahead of the open futures are down but off their lows, and given the options order flow yesterday I would be surprised if the market did not at least attempt to reverse some of yesterday’s sell off. Apple has been a great leading indicator of the overall market the past few months and in pre-market trading is up on the day and nearly $10 off its overnight lows, which coincided perfectly with a 50% Fibonacci retracement from its November ‘11 – October ’12 rally.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…