Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement. Take care, and let’s dig in.
Markets are mixed with equities under light pressure following OPEC+’s surprise oil production cut. It’s likely that Saudi Arabia “realized they were getting played [on the Strategic Petroleum Reserve refill] and took matters into their own hands,” some say.
Expectations of interest rate cuts have been pulled forward based on markets like SOFR, correlated to existing money market rates, where traders’ demand for call options (i.e., bet on rates falling) reveals the fear of a heavy rate-cutting cycle.
The S&P 500 (INDEX: SPX) closed above $4,100.00 for the first time in months. Many quickly wrote about new bull markets blooming in previously depressed market areas most sensitive to monetary policymakers’ policymaking.
Recall, however, that during the dot-com bust, the Nasdaq 100 (INDEX: NDX) rallied ~20% numerous times before an actual bull market was born. Experts think the same thing is happening; the rally, partly driven by monetary policy expectations and the removal/monetization of downside protection, particularly in markets where traders were most concerned about a de-rate and volatility, is probably in its later stages.
The marginal benefit of any further volatility compression is far less than the cost one may incur by volatility expanding; “there isn’t much juice left to squeeze,” SpotGamma adds, and though short-biased volatility trades (e.g., sell options) could work for a bit longer, the risks remain, as explained on Friday. Rolling profits from the initially low- or no-cost call options structures we discussed last week into fixed-risk debit equity put options structures seem attractive. More to come. Hope you liked the new format!
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