Tag: Box Spread

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Commentary

Daily Brief For March 21, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Not all doom and gloom. Make sure to read to the end!

Fundamental

In the Daily Brief for 3/20, we summarized the financial industry and policymaker responses that would turn asset fire sales into managed, orderly asset sales. 

Graphic: Retrieved from Sergei Perfiliev.

The net result of the intervention would be a reduction in credit creation, a tightening of financial conditions, as well as a slowing of the economy and inflation while, potentially, setting “a dangerous precedent that simply encourage[s] future irresponsible behavior” (e.g., risky lending/borrowing), the House Freedom Caucus put eloquently. Basically, the fear is in policymakers underwriting the losses of prevailing carry-type strategies and setting the stage for an even bigger unwind or so-called “Minsky moment,” the “sudden crash of markets and economies that are hooked on debt,” Bloomberg reports. 

The likes of Elon Musk express fear, too!

A systemic credit event is among strategists’ biggest fear, indeed. A Bank of America Corporation (NYSE: BAC) survey shows a credit event happening on the heels of a US shadow banking, corporate debt, and developed-market real-estate collapse. Recall this letter writer’s conversation with Simplify Asset Management’s Michael Green who said he sees “cracks in bubbles like commercial real estate” already appearing, too.

Bloomberg adds that JPMorgan Chase & Co (NYSE: JPM) strategists think the inverted yield curve signals recession and the stocks are likely nearing their high point.

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm.

JPM adds that market lows won’t occur until interest rate cuts ensue.

Graphic: Retrieved from BNP Paribas ADR (OTC: BNPQY).

Recall 3/20’s letter citing BAC research that finds selling markets on the last Fed rate hike is a good strategy. The “Minsky moment” comment/fear has others at JPM adding that investors should sell into relief bounces.

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

Most participants foresee rates continuing to rise by at least 25 basis points, per the CME Group Inc’s (NASDAQ: CME) FedWatch Tool. Following Wednesday’s (expected) hike, the path forward appears uncertain. Yesterday, the terminal/peak rate was at 4.75-5.00%. Today, the peak has shifted higher to 5.00-5.25%.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Financials look ready to fall off a cliff, to add. If they do, the whole market likely goes.

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm.

Positioning

We keep referring back to our Daily Briefs published last week (e.g., 3/13 and 3/14). In those letters, we talked about the growing concern about markets enduring some exogenous shocks. 

We opted to take the less extreme side since policymakers’ response was likely to stem (or push into the future) turmoil. Additionally, with participants easing up on their long-equity exposure, equity markets were likely to stay contained, relative to bond markets where the lack of liquidity is an issue, some believe. Anyways, following important events including inflation updates (i.e., CPI) and derivatives expiries, short bursts of strength (particularly in some of the previously depressed products such as the Nasdaq 100 or NDX, as explained 3/17) were likely to ensue heading into the end of this month and next month. Additionally, certain rates trades via options we set forth on 3/14 were ripe for monetization, too.

Rotating into a money market or T-bill fund or box spreads, while allocating some remaining cash to leverage potential by way of some call options structures, appeared attractive. While the T-bill or box spread exposures did not budge much, call options structures as proposed on 3/14 worked (and are likely to continue to work) rather well. The monetization of the rate structures discussed on 3/14 was timely, also.

The potential for coming events including the Federal Reserve’s (Fed) interest rate decision on Wednesday 3/22 to assuage participants’ fears of slowing may, accordingly, prompt fears of missing out on the upside, Bloomberg reports. A response may be FOMO-type demand for call options exposures, coupled with CTAs further “raising their equity exposure” on trend signals and lower volatility, boosting markets into a “more combustible” state as explained on 2/17. This fear of missing out is visible in options volatility skew; traders are hedging those tail outcomes.

Technical

As of 7:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,004.75. 

Key levels to the upside include $4,026.75, $4,037.00, and $4,045.25.

Key levels to the downside include $3,994.25, $3,977.00, and $3,959.25.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Reduction in dealer Gamma exposure. There may be an increase in volatility after the removal of large options positions and associated hedging.

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 14, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

A long(er) letter, today. Through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Take care!

Fundamental

Yesterday’s letter focused on the SVB Financial Group (NASDAQ: SIVB) failure, albeit with an optimistic tone. In short, the bank could not make good on fast accelerating withdrawals. Read more here.

According to one TechCrunch article, the likes of Founders Fund “reportedly advised their portfolio companies … to withdraw their money, … [and], if everybody is telling each other that SVB is in trouble, that will be a challenge,” as it was.

Graphic: Retrieved from @Citrini7. In the worst-case scenario, it was likely that uninsured depositors at SIVB would have received $0.80 on each dollar barring a bailout.

Authorities later put forth emergency measures guaranteeing all deposits. The effort shored up confidence in the banking system and markets strengthened, though some regional names such as First Republic Bank (NYSE: FRC) continued trading weak. In FRC’s case, the Federal Reserve’s (Fed) new bailout facility does not help. As former Fed trader Joseph Wang explains, “you need Treasuries and Agency MBS to tap the facility, and [FRC] barely owns any.”

Graphic: Retrieved via Joseph Wang.

Anyways, as yesterday’s letter briefly mentioned, expectations on the path of Fed Funds shifted. Traders put the terminal/peak rate at 5.00-5.25%, down from 5.50-5.75%, while pricing cuts after spring. Previously, no cuts were expected in 2023.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

Some Treasury yields fell spectacularly, too, …

Graphic: Retrieved from Bloomberg.

… on par with those declines experienced amidst major crises, at least in the case of the 2-year.

Graphic: Retrieved from Bloomberg.

Measures of US Treasury yield volatility implied by options (i.e., bets or hedges on or against market movement) adjusted higher, accordingly. This is often a harbinger of equity market volatility.

Graphic: Merrill Lynch Option Volatility Estimate retrieved from TradingView

Call options on the three-month Secured Overnight Financing Rate (FUTURE: SOFR) future (i.e., bets on interest rates falling in the future) paid handsomely.

For instance, bull call spreads that expire in December 2023 (e.g., BUY +1 VERTICAL /SR3Z23:XCME 1/2500 DEC 23 /SR3Z23:XCME 96/97 CALL @.0375) increased in value by about 650.00% to $0.33 (i.e., $750.00 per contract).

Graphic: Retrieved via TradingView. Three-month SOFR Future (December 2023). When SOFR is at a lower (higher) number, the market is pricing an increase (decrease) in interest rates. Participants put the December 2023 SOFR rate at 100-96.145 = 3.855%.

In the equity space, some readers may have caught some commentary on spot-vol beta in the VIX complex strengthening like we have not seen in a while, a nod to the harbinger of equity market volatility remark a few paragraphs higher.

Recommended Readings:

  • Read: The Ambrus Group’s Kris Sidial on two major risks investors should watch out for in 2023. In short, volatility’s sensitivity to underlying prices (spot-vol beta) was low, and Sidial cast blame, in part, on commodity trading advisors and strong volatility supply.
  • Read: Simplify Asset Management’s Michael Green on using option and bond overlays to hedge big uncertainties facing markets. Following 2022, investors swapped poor-performing long-dated volatility exposures for ones with bounded risk and less time to expiry, hence the increase in 0 DTE trading.
Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch.

This spot-vol beta remark suggests that (at least some of) the volatility in rates, as well as certain small pockets of the equity and crypto market, manifested demand for crash protection in the S&P 500, “which feeds back into VIX,” one explanation put well.

Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch. “[Last] week finally got a bit of explosiveness in VIX as fixed strike volatility got bid. This is VIX generic front month future and move in SPX. Last time it really “paid” to have VIX upside was Jan of 2022 (point in upper left corner).”

Notwithstanding, for these options to keep their value and continue to perform well, realized volatility (RVOL) must pick up substantially, which is not likely.

Unlimited’s Bob Elliott comments: “the bond market is pricing a broad-based credit crunch, … [and though] it’s not crazy for the Fed to slow down here given the current uncertainty,” odds are financial problems are contained and the Fed moves forward with its mission to get (and keep) inflation down.

Graphic: Retrieved from Fabian Wintersberger. Just as the “monetary expansion supported the rise in equity and bond prices in January.”

Consequently, “the pricing of Dec23s and 5yr BEIs makes no sense,” Elliott adds. This means the example SOFR trade above is/was ripe for some monetization, and equity volatility must be dealt with carefully (i.e., price movements must be higher than they are now which would be difficult given that authorities/Fed do not want liquidations).

In support of siding with the less extreme take, we paraphrase Kai Volatility’s Cem Karsan who says that for years prior to the 2007-2008 turmoil, macro tourists were calling for a crash.

For markets to crumble, there would have to be an exogenous event far greater in implications than what just transpired with SIVB over the weekend. With odds that such turmoil doesn’t happen soon, coupled with participants easing up on their long-equity exposure (i.e., selling stock and not needing to hedge, hence the statement that owning equity volatility must be dealt with carefully), RVOL is likely to stay contained. That’s not to say that this volatility observed in the rates market can’t persist. It’s also not to say that markets can’t continue to trade lower (in fact, with interest rates rising and processes like quantitative tightening challenging bank liquidity, there is less incentive for investors to reside in lower-yielding equities). It just means that, barring some exogenous event, the market remains intact.

Graphic: Retrieved from Jack Farley. “Silicon Valley Bank owns >$80 Billion of Mortgage-Backed Securities (MBS), a market that is ‘more prone to bouts of volatility’ because ‘small investors & leveraged funds have become the main buyers’ as the Fed & banks step away from market, according to Dec 2022 BIS report.”

Positioning

Following important events like the release of the Consumer Price Index (CPI) today, the compression of implied volatility or IVOL, coupled with the nearing of big options expirations (OpEx), sets the market up for potential short bursts of strength heading into the end of the month and next month.

Graphic: Retrieved from Bloomberg. Inflation has been well within forecasts.

A quick comparison of the Russell 2000 (INDEX: RUT) and Nasdaq 100 (INDEX: NDX) suggests this options-induced strength may help keep the recent re-grossing theme intact. The compression of wound IVOL and passage of OpEx, coupled with the still-live re-grossing theme, may put a floor under equities.

Graphic: Retrieved from TradingView. Orange = RUT. Candles = NDX. Note the weakness in RUT. Note the strength of the Nasdaq relative to the Russell.

To play, one could place a portion of their cash in money market funds or T-bill ETFs or box spreads, for instance, while allocating another portion to leverage potential by way of some call options structures that use one or more short options to help bring down the cost of a long option that is closer to current market prices (e.g., a bull call spread or short ratio call spread). To note, based on options prices as of this writing, it may be too early to enter call structures (i.e., too expensive given the context).

 Technical

As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,904.25. 

Key levels to the upside include $3,921.75, $3,945.00, and $3,970.75.

Key levels to the downside include $3,884.75, $3,868.25, and $3,847.25.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 3, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Lots of content today but a bit rushed at the desk. If anything is unclear, we will clarify it in the coming sessions. Have a great weekend! – Renato

Fundamental

Physik Invest’s Daily Brief for March 2 talked about balancing the implications of still-hot inflation and an economy on solid footing. Basically, the probability the economy is in a recession is lower than it was at the end of ‘22. For the probabilities to change markedly, there would have to be a big increase in unemployment, for one.

According to a blog by Unlimited’s Bruce McNevin, if the unemployment rate rises by about 1%, recession odds go up by 29%. If the non-farm payroll employment falls by about 2% or 3 million jobs, recession odds increase by about 74%. After a year or so of tightening, unemployment measures are finally beginning to pick up.

Policymakers, per recent remarks, maintain that more needs to be done, however. For instance, the Federal Reserve’s (Fed) Raphael Bostic, who generally carries an easier stance on monetary policy, mulled whether the Fed should raise interest rates beyond the 5.00-5.25% terminal rate consensus he previously endorsed. This commentary, coupled with newly released economic data, has sent yields surging at the front end. 

Graphic: Retrieved from TradingView.

Traders are wildly repricing their terminal rate expectations this week. The terminal rate over the past few days has gone up from 5.25-5.50% to 5.50-5.75%, and back down to 5.25-5.50%.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Positioning

Stocks and bonds performed poorly. Commodity hedges are uninspiring also in that they do not hedge against (rising odds of) recession, per the Daily Brief for March 1. 

In navigating this precarious environment, this letter has put forward a few trade ideas including the sale of call options structures to finance put options structures, after the mid-February monthly options expiration (OpEx). Though measures suggest “we can [still] get cheap exposure to convexity while a lot of people are worried,” the location for similar (short call, long put) trades is not optimal. Rather, trades including building your own structured note, now catching the attention of some traders online, appear attractive now with T-bill rates surging.

Graphic: Retrieved from Bloomberg.

Such trades reduce portfolio volatility and downside while providing upside exposure comparable to poorly performing traditional portfolio constructions like 60/40.

As an example, per IPS Strategic Capital’s Pat Hennessy, with $1,000,000 to invest and rates at ~5% (i.e., $50,000 is 5% of $1,000,000), one could buy 1000 USTs or S&P 500 (INDEX: SPX) Box Spreads which will have a value of $1 million at maturity for the price of $950,000.

With $50,000 left in cash, one can use options for leveraged exposure to an asset of their choosing, Hennessy explained. Should these options expire worthless, the $50,000 gain from USTs, at maturity, provides “a full return of principal.”

For traders who are focused on short(er)-term movements, one could allocate the cash remaining toward structures that buy and sell call options over very short time horizons (e.g., 0 DTE).

Knowing that the absence of range expansion to the downside, positioning flows may build a platform for the market to rally, one could lean into structures like fixed-width call option butterflies.

For instance, yesterday, Nasdaq 100 (INDEX: NDX) call option butterflies expanded in value ~10 times (i.e., $5 → $50). An example 0 DTE trade is the BUTTERFLY NDX 100 (Weeklys) 2 MAR 23 12000/12100/12200 CALL. Such trade could have been bought near ~$5.00 in debit and, later, sold for much bigger credits (e.g., ~$40.00).

Such trade fits and plays on the narrative described in Physik Invest’s Daily Brief for February 24. That particular letter detailed Bank of America Corporation’s (NYSE: BAC) finding that “volume is uniquely skewed towards the ask early in the day but towards the bid later in the day” for these highly traded ultra-short-dated options.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg. 

Even options insight and data provider SqueezeMetrics agrees: “Buy 0 DTE call.” The typical “day doesn’t end above straddle b/e, but call makes money,” SqueezeMetrics explained. “Dealer and call-buyer both profit. Gap down, repeat.”

Anyways, back to the bigger trends impacted by liquidity coming off the table and increased competition between equities and fixed income.

Graphic: Via Physik Invest. Net Liquidity = Fed Balance Sheet – Treasury General Account – Reverse Repo.

As this letter put forth in the past, if the “market consolidates and doesn’t break,” as we see, the delta buy-back with respect to dropping implied volatility (IVOL) or vanna and buy-back with respect to the passage of time or charm could build a platform for a FOMO-driven call buying rally that ends in a blow-off. 

Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch. Short volatility and short stocks was attractive to trade. As your letter writer put in a recent SpotGamma note: “With IV at already low levels, the bullish impact of it falling further is weak, hence the SPX trending lower all the while IV measures (e.g., VIX term structure) have shifted markedly lower since last week. If IV was at a higher starting point, its falling would work to keep the market in a far more positive/bullish stance.”

Per data by SpotGamma, another options insight and data provider your letter writer used to write for and highly recommends checking out, call buying, particularly over short time horizons, was often tied to market rallies. 

Graphic: Retrieved from SpotGamma via Bloomberg.

“0DTE does not seem to be associated with betting on a large downside movement. Large downside market volatility appears to be driven by larger, longer-dated S&P volume,” SpotGamma founder Brent Kochuba said in the Bloomberg article. “Where 0DTE is currently most impactful is where it seems 0DTE calls are being used to ‘buy the dips’ after large declines. In a way this suppresses volatility.”

Anyways, the signs of a “more combustible situation” would likely show when “volatility is sticky into a rally,” explained Kai Volatiity’s Cem Karsan. To gauge combustibility, look to the Daily Brief for February 17.

Technical

As of 6:50 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,988.25. 

Key levels to the upside include $3,999.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,975.25, $3,965.25, and $3,947.00.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

Vanna: The rate at which the Delta of an option changes with respect to implied volatility.

Charm: The rate at which the Delta of an option changes with respect to time.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Reduction in dealer Gamma exposure. Often, there is an increase in volatility after the removal of large options positions and associated hedging.

Options: Options offer an efficient way to gain directional exposure.

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around the target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to the direction (Delta), movement (Gamma), time (Theta), and volatility (Vega). 

  • Negative (positive) Delta = synthetic short (long).
  • Negative (positive) Gamma = movement hurts (helps).
  • Negative (positive) Theta = time decay hurts (helps).
  • Negative (positive) Vega = volatility hurts (helps).

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 2, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 6:15 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

A tight monetary environment resulted in a hesitation to take risks. With inflation high, in the face of exogenous events (e.g., geopolitics disrupting deflationary influences) and beyond, assets were sold.

Graphic: Retrieved from Topdown Charts.

With inflation still hot and the economy on solid footing (i.e., “stronger growth for longer” per Unlimited’s Bruce McNevin), traders price even “tighter monetary policy and a harder eventual landing to ease inflation pressure.” This is not good for assets.

Graphic: Retrieved from Unlimited.

In fact, for a moment yesterday, traders put the terminal rate at 5.50-5.75%, up from 5.25-5.50% prior to the market opening.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) via The Kobeissi Letter on March 1, 2023, at 10:55 AM.

For the Federal Reserve (Fed) to hit its inflation target, likely in the range of 2-4% per Oaktree Capital Management’s Howard Marks said the real Fed Funds rate has to be positive. This effort puts the economy at risk of recession, said the Federal Reserve’s Neel Kashkari.

“Typically when the Fed raises rates to cool down inflation, it leads to a recession,” Kashkari explained, adding that “getting inflation down is job number one.”

Per Unlimited’s McNevin, the probability the economy is in a recession is lower than it was at the end of last year. For probabilities to change, there would have to be a large increase in unemployment. For instance, if the unemployment rate rises by about 1%, recession odds go up by 29%. If non-farm payroll employment falls by about 2% or 3 million jobs, recession odds jump by 74%.

Graphic: Retrieved from Unlimited.

Positioning

Per last month’s remarks by Kai Volatility’s Cem Karsan, quoted in Physik Invest’s Daily Brief for February 17, 2023, if the market was to not breakdown sharply after February monthly options expiration (OpEx), as we see today, then options decay could build a platform for a FOMO-driven call buying rally that ends in a blow-off. 

Consequently, trades this letter put forth last month (e.g., call verticals sold to finance put verticals expiring months from now) would suffer greatly.

“We’ve had an intraday range of 33.5 [points] thus far. That’s not vol[atility] expansion, which is what I’d want to see if I was short,” volatility trader Darrin John put well. “If the market doesn’t do what you think it should, in a reasonable amount of time, then it’s best to [exit].”

At the same time, with portfolio constructions like 60/40 not as attractive in this macroeconomic environment (i.e., asset headwind from monetary tightening, as well as slowing growth and inflation headwind to bonds and commodities), traders can look to Physik Invest’s Daily Brief for February 28, 2023, for ideas on how to navigate. In that letter, we talked about how traders can participate in the upside by about the same amount they would with a traditional construction (e.g., 60/40) while eliminating their downside risk exposure.

For instance, one can buy enough bonds/box spreads so that, at their maturity, the principal is returned. The cash remaining can be invested in leverage potential.

Ending with a supporting quote from Oaktree’s Howard Marks: “Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets.”

Technical

As of 6:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,943.25. 

Key levels to the upside include $3,965.25, $3,975.25, and $3,988.25.

Key levels to the downside include $3,926.25, $3,908.25, and $3,891.00.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Reduction in dealer Gamma exposure. There is usually an increase in volatility after the removal of large options positions and associated hedging.

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 28, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

A light letter, today.

Check out the Daily Brief for February 27, 2023, for how to take advantage of higher interest rates and define the outcome of your trading.

As an aside, the second to last positioning section paragraph in that letter talks about using short-dated bets like “butterflies, broken-wing butterflies, ratio spreads, back spreads, and beyond.” In the initial version of the letter, your letter writer accidentally wrote box spreads instead of back spreads. Apologies.

Positioning

Yields are ~5.00%, and this is around the S&P 500’s (INDEX: SPX) earnings yield (i.e., the 6-month Treasury yield is about equal to the SPX’s earnings yield of 5.2%).

Graphic: Retrieved from ustreasuryyieldcurve.com. 

A nod to rising rates and risk premiums, the likes of Morgan Stanley suggest the S&P 500 (INDEX: SPX) will come under further pressure.

Graphic: Retrieved from Morgan Stanley (NYSE: MS).

Since not all who read the letter are active in the same timeframe, in the interest of expanding the opportunity set if we will, your letter writer detailed ways to express one’s longer-term opinion on the upside or downside in a capital-protected way.

Essentially, traders can create their own structured notes, investing in a manner that returns principal only. The difference between the bond/box spread outlay and cash remaining is invested in leverage potential. At maturity, the worst-case is a return of principal.

Further, through such structures, traders can participate in the upside by about the same amount they would with a traditional construction (e.g., 60/40). However, you cut the downside.

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

Alternatively, traders can bias themselves short or non-directionally. In a short-bias situation, one can buy a put spread (and/or sell a call spread) with an outlay (or max loss) not exceeding the cash remaining after the purchase of a bond or box spread.

Through a short-biased setup, traders may participate in potential downside on the pricing of equity market headwinds.

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM).

The suggested downside trades are rather attractive now in the absence of hedging demands in longer-dated protection convex in price and volatility. Naive measures like the Cboe VIX Volatility (INDEX: VVIX), as well as the graphic below, allude to the little demands for convexity and a declining sensitivity of the VIX with respect to changes in share prices.

Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR).

Technical

As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,992.75. 

Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

The author, Renato Leonard Capelj, works in finance and journalism.

Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.

Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 27, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:45 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Positioning

In The Second Leg Down: Strategies For Profiting After A Market Sell-Off, there is one passage on the inaccuracy of normal distributions in markets and serial correlation, as well as the underpricing of rare events. In that same passage, Nassim Nicholas Taleb is credited for his advocacy on portfolio allocations to safe short-term government bonds and high-risk speculative bets through which “you could lose no more than your initial investment.”

Naturally, this leads to Exotic Options and Hybrids. Structured notes, to quote chapter two, are “composed of a non-risky asset providing a percentage of protected capital and a risky asset offering leverage potential.”

The structure, as a whole, is not risky in the absence of defaults. The bond, which is bought at a discount, increases in value until maturity. The difference between the initial value to allocate (100% of notional) and the bond purchase price is allocated to the leverage (e.g., options) component of the structure.

Graphic: Retrieved from Exotic Options and Hybrids.

This type of capital-protected structure is particularly attractive right now, given the interest rate environment. That’s because high-interest rates decrease the initial value of the bond. This means we can allocate more to leveraged bets, for example.

During the life of the structured note, the value of the non-risky part increases when interest rates decrease. At maturity, the value of the bond component is equal to 100% of the notional while the value of the riskier part of the note is “non-linear and fluctuates depending on many market parameters such as the underlying’s spot, interest rates, borrowing costs, dividend yield or volatility.”

Graphic: Retrieved from Exotic Options and Hybrids. For illustration only.

Last week, IPS Strategic Capital’s Pat Hennessy wrote a thread on how to apply this information. 

Basically, with interest rates near 5% at the front of the yield curve, and traditional portfolio constructions performing poorly, defined-outcome investing is attractive. 

With $1,000,000 to invest and rates at ~5% (i.e., $50,000 is 5% of $1,000,000), one could “purchase 1000 USTs [or S&P 500 (INDEX: SPX) Box Spreads] which will have a value of $1 million at maturity for the price of $950,000.”

Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

With $50,000 left in cash, one can use options for leveraged exposure to an asset of their choosing, Hennessy explained. Should these options expire worthless, the $50,000 gain from USTs, at maturity, provides “a full return of principal.”

In an example, Hennessy presented a structure providing 60% of the upside gain of the S&P 500 with full principal protection should markets fall. Though “you may initially scoff at 60%, [] keep in mind that historically 60/40 has captured between 60-70% of the upside of equities.”

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

If you’re bearish or unopinionated, Hennessy presented capital-protected structures that make money if the market moves lower (e.g., instead of buying a call option on the SPX, buy put options or a put options spread) or sideways (e.g., sell defined-risk option condor structures).

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

Markets have a tendency to move big and continue moving big in the same direction, over the very short term, hence the “fat tails in the distribution over short horizons,” to quote The Second Leg Down. Given this, your letter writer can use his analyses to capitalize big on underpricing and participate in upside or downside through a series of short-dated options bets (e.g., butterflies, broken-wing butterflies, ratio spreads, back spreads, and beyond) that, in time, may return in excess of ~10 times the initial investment. Should nothing happen, then he walks away with his principal. That’s trading made less stressful.

Have a great day. If you enjoyed today’s letter, consider sharing it with your friends!

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

Technical

As of 7:40 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,992.75. 

Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

The author, Renato Leonard Capelj, works in finance and journalism.

Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.

Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For January 26, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 8:00 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.

Positioning

It’s a dynamic this letter has discussed before. Levels quoted in the bottom section of this letter have proved useful in recent trade, marking the bottom and top of rallies precisely. A factor to blame is short-term participation. Let’s explain this further.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

For instance, as SpotGamma said this morning, volumes at options strikes, very close to levels this letter quotes, are very large relative to the open interest changes. These volumes are large enough to add to the movement and result in responses to certain areas, but their impact is not long-lasting. In fact, some suggest the activity is part of “trading for risk positioning” and the impact “can net out” over a longer time horizon.

It is this letter writer’s opinion that the noise is easy to get swept into. Rather, we are interested in participating in the bigger strides, hence the trades we’ve quoted prior.

As your letter writer elaborated in a recent note for SpotGamma, following weakness heading into the January monthly options expiration (OpEx), the window was open for relief. A cross above big inflections like the 200-day simple moving average, a trigger for some to buy stocks, coupled with measures like the Cboe Volatility Index (INDEX: VIX) trending higher, partly the result of the fear of missing out and hedging in a lower liquidity environment, had us leaning optimistic.

Graphic: Retrieved from Bloomberg.

Notwithstanding, with measures like the Cboe VIX Volatility (INDEX: VVIX) “at low levels and rebounding” implying “(1) traders are looking to hedge for cheap and (2) convexity remains a good place to be”, we had the interest to limit downside via call structures with long and short options. The short options help us harvest a bit of call skew and lower the cost of the spread, helping it retain “value better through time.”

Graphic: Retrieved from Bloomberg.

In short, though “the marginal positivity of further IV compression likely does little to keep stocks on an upward trajectory”, SpotGamma explained, structures we explained recently may enable you to get on the right side of an SPX and VIX up environment (explained by SpotGamma), all the while limiting downside on the eventual turn.

If you’re averse to directional risk, consider trades like the Box Spreads we talked about many letters back, which are now gaining popularity.

Technical

As of 8:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Our S&P 500 pivot for today is $4,050.25. 

Key levels to the upside include $4,061.75, $4,071.50, and $4,083.75.

Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.

Click here to load updated key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily. 

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: Denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes.

Categories
Commentary

Daily Brief For January 13, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) measure reflects the total attractiveness of owning volatility.

Administrative

A bit late as your letter writer is getting ready to travel. Sorry and have a great Friday!

Fundamental

Thursday’s inflation update was as expected.

The Consumer Price Index (CPI) saw a 6.5% rise year-over-year (YoY) and a 0.1% fall month-over-month (MoM). Core CPI was +5.7% YoY and +0.3% MoM. 

In his post-CPI analysis, Andreas Steno Larsen said inflation has mostly disappeared, and, if we cut shelter costs, which are outdated, “deflation on a quarterly and monthly basis is here.”

Graphic: Retrieved from Andreas Steno Larsen.

The Federal Reserve’s (Fed) “favored statistical measures for underlying inflationary pressure all confirm a decline,” added Bloomberg’s John Authers.

“Prices are beginning to behave more as central bankers would wish,” paving the way to a downshift in tightening, as is priced by the markets. Using the CME Group Inc’s (NASDAQ: CME) FedWatch Tool, traders were split, and the odds of a 25 or 50 basis point hike were more even prior to CPI.

The odds are now skewed toward a 25 basis point hike.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool. Depending on the measure, rates are seen peaking between 4.9% and 5.10%.

Despite the odds of a less aggressive hike – yields falling and swaps suggesting the Fed could skip a hike in March – and the impact that has on valuing businesses (e.g., firm profits worth less at higher interest rates hence the de-rate of 2022), the data suggests that “inflation spikes have never been vanquished until the federal funds rate exceeds the inflation rate,” and, with the return in deflation, Steno Larsen said, the outlook for stocks remains poor.

“Remember that the PPI (and the CPI for that matter) is a leading indicator for EPS.” Consequently, “we are in for negative EPS.”

If you’re not an active trader and unable to participate in both the up- and down-side of markets, then you may capitalize on higher interest rates with Treasury bills or Box Spreads, which allow you to create loan structures similar to a Treasury bill. Upon the spread’s maturity, it settles and earns a competitive interest rate.

Graphic: Retrieved from boxtrades.com.

If you’re an active trader, as I said to one subscriber privately, “the more depressed technology names to the upside for debits [were] attractive” (i.e., buying call option structures in the likes of Tesla and Amazon).

This is while put structures you may monetize in case of a large repricing in volatility have kept their values well amid what appears to be a shift higher in the skew; in the past days, we talked about measures including the Cboe VIX Volatility (INDEX: VVIX) printing at historic levels.

Graphic: Updated January 12, 2023. S&P 500 (INDEX: SPX) volatility skew retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

Measures like the VVIX suggests “we can get cheap exposure to convexity while a lot of people are worried,” as The Ambrus Group’s Kris Sidial said in one article. Though volatility can be bimodal (i.e., stay low for longer for lack of better phrasing), from a “risk-to-reward perspective, … it’s a better bet to be on the long volatility side,” given “that there are so many things that … keep popping up” from a macro perspective.

Graphic: Cboe VIX Volatility (INDEX: VVIX) via TradingView.

Technical

As of 7:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,988.25 HVNode. 

Key levels to the upside include $4,000.25, $4,011.75, and $4,028.75.

Key levels to the downside include $3,979.75, $3,959.00, and $3,943.25.

Click here to load today’s key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily. 

As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: Denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes.

Categories
Commentary

Daily Brief For September 27, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

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Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

Top of mind, yesterday, was the drop in Britain’s currency (GBP) and a surge in bond yields on the back of new fiscal plans and pledged tax cuts, alongside a more easy pace of interest rate hikes by the Bank of England (BoE). See the Daily Brief for September 26, 2022, for context.

Graphic: Retrieved from Bloomberg.

Knowing that the fiscal stimulus and an easy-moving BoE would add to inflation that is already high and sticky, traders began pricing emergency rate hikes, all the while conversation around the impacts of the UK’s rising rates on mortgage lending and the “dollar doom loop” surfaced.

In response, the BoE’s Governor Andrew Bailey said they were “monitoring developments in financial markets,” and at the “next scheduled meeting of the impact on demand and inflation from the Government’s announcement, and the fall in sterling, … [t]he MPC [won’t] hesitate to change interest rates by as much as needed to return inflation to the 2% target.”

Per Citigroup Inc (NYSE: C), however, “[m]onetary policy will struggle to save FX when fiscal policy is the culprit.”

Lawrence Henry Summers, a former US Secretary of the Treasury, also commented that he “would not be amazed if British short rates more than triple in the next two years and reach levels above 7 percent.”

That’s “because US rates are now projected to approach 5 percent and Britain, [which] has much more serious inflation, is pursuing more aggressive fiscal expansion and has larger financing challenges.”

Graphic: Retrieved from Bloomberg.

On the topic of rising yields and lenders’ disinterest to issue mortgages, among other things, it is the case that bond buying, via tools such as quantitative easing (QE), left room for confidence to eventually run out and the bond market to revolt.

Read our monetary policy explainers published on September 19 and 20.

Per statements authored by Bloomberg’s John Authers, the “UK appears to be the first case of a true disorderly bond selloff, where the moves are so swift that they affect the functioning of the financial system. It’s been triggered by a combination of inflation and rash fiscal policy.”

Accordingly, the actions by policymakers abroad serve to reinforce the earlier discussed “dollar doom loop”; the rising USD, though reducing the impact of inflation in the US, ultimately hurts most dollar-denominated debt servicing (see Latin America in the 1980s).

Graphic: Retrieved from Bloomberg.

Positioning

Seasonally speaking, the week after September options expiry (OPEX) is one of the worst on record. The weakness often persists into October.

To quote Kai Volatility’s Cem Karsan:

So, “less support from Vanna and Charm, less support through QT, and less buyback,” presents a “fragile moment” with the next week representing the most “dangerous period” on record.

Graphic: Retrieved from SpotGamma. “SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.”

For context, it is the impacts of quantitative tightening (QT) which is manifesting itself as “$4.5 billion less in demand for assets per day,” as well as the blackout period for buybacks (which were consistently “supporting the market”) and options repositioning bolstering the weakness.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

Separately, a hot topic concerns the money that is piling into money funds where “the vast bulk now earns upwards of 2%, with pockets paying 3%, 4% or more.”

Graphic: Retrieved from Bloomberg. “Money funds, banks, and others are so flush with cash these days that they’re shoveling record amounts into the Fed’s overnight reverse repurchase agreement facility, a short-term instrument that, following the central bank’s 75 basis point hike last week, now pays a rate of 3.05%.”

The theory is as follows: if “cash is yielding 4%, why not just sit in cash while the macro environment clarifies a little bit?”

With traditional 60/40 upended, and the gap “between what banks are paying on deposits and what money-market funds are offering” widening, “money funds are likely to attract more inflows going forward as a result, pushing [the] usage of the RRP facility even higher.” 

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

This is all, however, money that is waiting to be deployed, “should market sentiment improve, or asset prices tumble to levels too attractive to pass up.”

Should you, too, desire to pursue guaranteed rates of return, last week Box Spreads were put forth as a solution. These trades “allow market participants to create a loan structure similar to a Treasury bill.” Upon maturity, the Box Spread earns a competitive interest rate.

Price some trades at boxtrades.com.

Graphic: Retrieved from boxtrades.com.

Technical

As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $3,688.75 HVNode puts into play the $3,722.50 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,771.25 and $3,826.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,688.75 HVNode puts into play the $3,638.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,610.75 and $3,554.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

About

After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For September 22, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

Subscribe
Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

An easy read, today. For more complex, see the September 20 and 19 letters. Also, there will not be a letter published for Friday, September 23, 2022. See you next week, team!

Fundamental

Equity markets traded down, yesterday, on the heels of the Federal Reserve’s (Fed) decision to raise interest rates by 0.75% and “keep at it” for longer, eyeing a 1.25% jump, in sum, by 2023.

This puts the current target rate at 3.00-3.25%.

Separately, if the “keep at it” quote sounds familiar, that’s because it is. The Fed Paul Volcker’s memoir is titled “Keeping at It.”

Graphic: CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows higher odds of a 75 to 100 basis point rate hike in November, along the lines of what the futures market was pricing heading into the event.

The Fed Chair Jerome Powell admitted there may be below-trend growth and the potential for unemployment to reach 4.4% next year, up from the current rate of 3.7%. Projected increases, as of yesterday, show interest rates at 4.4% by 2023, and 4.6% in 2023, before moderation in 2024 to 3.9%, as well summarized by Bloomberg.

Graphic: Retrieved from Bloomberg.

Moreover, economists suggest that raising rates to 4.5% would cost the economy nearly 1.7 million jobs while rates at 5% would bring that number to 2 million. A higher savings rate and increased funds at the state level would likely cushion the blow, however.

In response, the likes of Ark Invest’s Cathie Wood, who we quoted recently regarding her thoughts on why the Fed needs to lower the pace of tightening and/or cut, said:

“Most disappointing about the Fed’s decision today was its unanimity. None of those voting on the Federal Reserve is focused on the significant price deflation in the pipeline. The Fed seems to be making decisions based on lagging indicators and analogies.”

She adds that the Fed is setting the stage for deflation:

“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot.”

Graphic: Initially retrieved from Bloomberg. Taken from Ophir Gottlieb who concludes costs are dropping, as observed via shipping, gasoline, manufacturing, cars, and rent measures.

Moreover, it’s the case that “[a]s rates rise and debt servicing costs increase, ‘many zombie institutions, zombie households, corporates, banks, shadow banks, and zombie countries are going to die,’” said economist Nouriel Roubini, who predicted the 2008 financial crisis. 

Prior to the Fed event, Roubini forecasted a 75 basis point hike in September, followed by a 50 basis point hike in November. The market is pricing more than what Roubini thought the Fed would probably do after Wednesday’s Fed meeting.

In his opinion, stay “light on equities and have more cash, … [as] equities and other assets can fall by 10%, 20%, 30%.”

Positioning

In short, unexpected was the post-event response. In recent times, post-Fed moves have been positive, driven by the “rebalancing of dealer inventory,” per Kai Volatility’s Cem Karsan.

That didn’t happen and let’s unpack why.

Basically, into the event, traders demanded protection and bid implied volatility (IVOL). The assumption is that counterparties, who are likely on the other end, have exposure to positive Delta and negative Gamma, which they hedge through negative Delta trades in the underlying.

Should fears have been assuaged, the supply of that protection once demanded, would have decreased IVOL (and options Delta), providing the markets a boost.

Graphic: Retrieved from SqueezeMetrics.

That didn’t happen. Instead, traders added protection, as shown by this SpotGamma graphic tracking changes in put open interest on the S&P 500 (INDEX: SPX).

Graphic: Retrieved from SpotGamma. Updated September 22, 2022.

This bid some basic measures of IVOL into the close.

Graphic: Retrieved from VIX Central. Updated September 21, 2022.

That’s as these particular options, which were added at much lower prices, as I explained in a SpotGamma note, recently, “are far more sensitive to changes in direction and IVOL.”

These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly. “If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Retrieved from SqueezeMetrics.

Notwithstanding, it’s still the case that a “reload on fresh short-dated downside” flows heighten the risk of a “negative Delta squeeze … into month end,” said Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott. 

Therefore, “you have to consider a move up [to] $4,000.00 as part of your distribution of outcomes to the upside,” as that is near where “market makers are ‘long,’” as part of an impactful collar trade many are aware sits.

As an aside, some online conversation was sparked around placing cash into riskless trades for some small, but guaranteed, rates of return. In that conversation, Box Spreads were put forth as a solution to lend cash and earn a competitive interest rate.

For context, “Boxes allow market participants to create a loan structure similar to a Treasury bill. T-bills are ‘discount’ instruments that are purchased at a value less than the stated face value. Upon maturity, bills call for the return of the stated face value.”

“For example, one might buy a $1 million 90-day T-bill for $998,000. Ninety days later, the $1 million face or principal value is returned and the $2,000 discount is earned as interest. One may represent the rate on this transaction as a 0.80% or 80 basis point discount yield [= (360/90) x ($2,000/$1,000,000)]. The effective rate on a box represents a ‘discount yield’ similar to a quoted T-bill rate.”

Graphic: Retrieved from boxtrades.com.

IPS Strategic Capital’s Pat Hennessy explains that SPX boxes “typically yield[] 20-40 bps above [the] corresponding maturity risk-free rate.” Additionally, there are tax advantages to using the S&P 500’s 1256 contracts. 

For easier fills, use the “3K/4K line in an AM settled expiry,” Hennessy noted. “Helps if you know where the broker market is.”

Technical

As of 8:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $3,826.25 HVNode puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as high as the $3,893.00 VPOC and $3,936.25 ONH, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,826.25 HVNode puts into play the $3,770.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,722.50 LVNode and $3,688.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.