Tag: JPM – JPMorgan Chase & Co

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Commentary

Daily Brief For February 14, 2023

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Graphic updated 8:05 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. 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. UMBS price via MND. Click here for the calendar.

Fundamental

Companies are slowing price increases, 

The Transcript, quoting earnings calls, shared with subscribers. Notwithstanding, consumer spending still reads strong. Mastercard Inc (NYSE: MA) measured ~9% growth in spending last month, and this points to the presence of inflation in the system that needs to be worked out. 

Consequently, Federal Reserve (Fed) officials maintain that “more needs to be done”, and this is evident in traders’ guesses as to where rates peak (i.e., terminal rate), and when the eventual reduction in rates is set to occur (i.e., easing). 

The free CME Group Inc (NASDAQ: CME) FedWatch Tool shows rates peaking in the 5.00-5.25% range through November. Then, in December, traders price a move back to the 4.75-5.00% range where we are now.

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

This is the pricing is in anticipation of rising consumer prices; the Consumer Price Index (CPI) due at 8:30 AM ET, is set to rise 0.5% in January, the most in a few months. Core CPI, which matters a lot to the Fed, is set to advance by about 0.4%.

JPMorgan Chase & Co (NYSE: JPM) thinks that “data close to estimates would be treated as confirming a continued cooling in inflation, which would imply a fall for bond yields and the dollar, while tech shares would lead an advance for US stocks.”

“But, any equity gains are likely to fade, [JPM] warned, ‘once investors shift attention to a relatively slower pace of disinflation than the previous two months, where each CPI print saw a decrease of 60 basis points.’”

Graphic: Retrieved from Bloomberg.

So in-line CPI, coupled with a strong January jobs report, will “corroborate recent comments from Fed officials that further interest-rate hikes are likely forthcoming,” Bloomberg adds. In a post by Joseph Wang, a former Fed trader, “a higher interest rate environment implies a more potent [quantiative tightening or] QT.”

“The Fed’s aggressive hikes have yet to reach the bulk of bank deposits, which is the foundational financial asset for many households. These deeply negative real yields may be extending the portfolio rebalancing impact of QE. Some households have escaped financial repression by moving into Treasury bills or money market funds, but that is not the only refuge. The perceived return of risk assets likely remains high for many, as the memory of the 2021 boom is still fresh.” Further, a “sizable yield upgrade being forced onto the market may indicate a more impactful QT.”

QT, to put it simply, is the flow of capital out of capital markets. Higher rates for longer and more QT are not good for risk assets. Though money is flowing from other parts of the world, which, in part, has bolstered buying of assets over the past months, accelerating “QT shifts the composition of financial assets towards those that better reflect the Fed’s restrictive stance.”

Positioning

In the post-CPI expirations, implied volatility (IVOL), a demonstration of traders’ fears and demands for protection, is wound and is likely to serve as a catalyst for a fast move after CPI. Should fears be assuaged (i.e., barring the unexpected), wound volatility is likely to compress and this may result in a short-term market boost.

However, the sale and expiry of protection, after CPI and particularly the coming options expiration (OpEx), is likely to put the market in a precarious position.

According to SpotGamma, “current positioning, a result of re-grossing over the past weeks and months, has boosted dealer exposure to positive gamma.” This means counterparties (i.e., dealers) make money when the market moves and hedge in a manner that reduces volatility, “hence more rangebound trade as we have seen.”

Following OpEx, counterparty exposure to positive gamma will decline and “leave markets more at the whim of macro-type repositioning” which counterparties will do less to disrupt and more to bolster (i.e., add to movement).

Therefore, as SpotGamma summarizes, “[b]e prepared for potential relief immediately after CPI. However, across a longer time horizon, there is potential for weakness and that weakness may be exacerbated by dealer hedging.”

Technical

As of 7:15 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 balanced overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,159.00. 

Key levels to the upside include $4,168.75, $4,189.00, and $4,202.75.

Key levels to the downside include $4,137.00, $4,123.25, and $4,100.25.

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.

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, 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 or find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram.

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 24, 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.

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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. 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.

Administrative

Monday’s letter had some holes. Let’s try to fill them in, today, and get a fuller picture.

Summary of today’s letter: though the real economy may be strong, sticky inflation likely results in higher rates for longer, as well as quantitative tightening. This is not good for the financial economy. Some suggest the equity market rally persists into mid-February before further weaknesses appear. Read on for more.

Fundamental

Many sentiment and positioning indicators are bearish.

For instance, surveys by Bank of America Corporation (NYSE: BAC) point to allocators being very underweight US stocks. Also, investors are reporting some of their biggest one-month exits from stocks since BAC started surveying.

Graphic: Retrieved from BAC via Bloomberg’s John Authers.

The consensus is turning more bearish, we see, and some of this letter’s most quoted voices maintain that markets (not necessarily the economy) are in for more weakness.

That is in the face of a severely depressed S&P 500 (INDEX: SPX) crossing above key areas denoting technical resistance, a signal for trend-followers to get involved on the long side (i.e., buy stocks) Kai Volatility’s Cem Karsan explained in a video last week.

Graphic: Retrieved from Bloomberg.

Equity market strength drivers, Karsan said, include China reopening and increasing stimulus, Europe’s not-so-bad winter, and little worsening of conflicts (e.g., Ukraine and Russia situation).

Adding, as The Macro Compass’ Alfonso Peccatiello said, the bond market thinks the Fed will not hike into a recession. Inflation likely “slows down to 2.5% quickly, [with] the Fed cutting rates to neutral (and never below). [That’s] not recessionary pricing. It’s immaculate disinflation pricing.”

The base case is a landing that’s soft.

To elaborate, the data shows the Fed cut by about 350 basis points or so within 18 months of the start of a recession, Peccatiello said. Now, the markets are pricing a mid-2023 pivot with about 200 basis points of cuts between 2023 and 2024.

Graphic: Retrieved from Nasdaq Inc (NASDAQ: NDAQ).

“That must mean the bond market’s base case (60%) is a recession,” Peccatiello said, noting that the Fed Funds is not pricing “below reasonable estimates of neutral rate (2.25-2.75% in nominal terms)” in the next 2-5 years. That means this would be the first time ever the US is in a recession and the Fed doesn’t cut rates below neutral.”

Graphic: Retrieved from The Macro Compass.

And, though downside earnings revisions are happening, the “2023 EPS consensus at $225 implies a +4% earnings growth this year [while] in [past] recessionary episodes the average EPS decline is instead -30%.”

“[C]yclical sectors and countries are outperforming defensive,” and there is little fear and desire to protect against far-reaching weakness. “Protection in the S&P 500 is at the cheapest levels in 2 years” as evidenced by “the implied volatility in 20% out-of-the-money SPX puts … trading in the lowest” percentiles.

But, as Karsan implied in his recent appearance, there’s a disconnect. The economy is not the stock market, and the liquidity context is poor, which many may not recognize.

The economy performing well due to China reopening and strong demand among businesses surveyed, consumers’ savings excesses, persistent credit boom, and a strong labor market suggest inflation lasts longer.

Consequently, interest rates remain higher for longer and quantitative tightening is likely to persist. This is not so good for the financial economy.

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

“[B]lindly trusting the bond market could end badly,” Fabian Wintersberger added, noting that “recent bear market rallies in stocks and bonds will reverse” eventually. 

Karsan appears to agree: though green shoots are likely to push better than expected economic performance, the Fed “is in a box” and this rally likely ends in early spring.

Graphic: Retrieved from Nasdaq Inc (NASDAQ: NDAQ). Note that “[h]igher rates act as a headwind for valuations – prices should fall if earnings don’t change [and] increased earnings make PEs (valuations) fall and make stocks look more attractive.” Currently, “the market is currently pricing in a year where rates and earnings don’t change much … inflation could stay elevated [with China reopening and supply chain re-shoring] which means rates should too.”

For now, the break of the 200-day moving average is a significant impetus since it’s a level many watch (i.e., technicals matter if enough people look at them). The chase is manifesting an SPX up, Cboe Volatility Index (INDEX: VIX) up dynamic (i.e., those who fear they may miss a rally bid volatility while the underlying market trades higher).

The Daily Brief for January 13 said “the more depressed technology names to the upside for debits [looked] attractive.”

Accordingly, Tesla Call Ratio Spreads have performed really well.

The 1/2 BACKRATIO TSLA 100 17 FEB 23 160/180 CALL is pricing in excess of a $1.00 credit to close, up about 400% in the span of 14 days or so.

A push likely lasts until mid-February, after which a window for weakness may open, particularly with the liquidity context (see the below video) no longer as supportive. However, if the market consolidates for a period after, this would be bullish.

To end, the median projection puts the S&P 500 at a level above $4,000.00 by year-end with the worst estimate putting the index at $3,000.00.

Joseph Wang explained, also, that there is an “increasing probability of a second bout of inflation, an issue in the 1970s that the Fed is keen to avoid … [by] retighten[ing] financial conditions … through its balance sheet” with an extended quantitative tightening or QT maintained “even if policy rates are cut.”

Given that QT is the flow of capital out of capital markets, this context presents more pressure on the financial economy (not necessarily the real economy).

Technical

As of 6:55 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the bottom 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 $4,028.75. 

Key levels to the upside include $4,045.75, $4,061.75, and $4,077.00.

Key levels to the downside include $4,011.75, $3,998.25, and $3,988.25.

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.

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: 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.

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.

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

Be cognizant of risk exposure. 

  • 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

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 December 28, 2022

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 6:40 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. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Positioning

In Physik Invest’s Market Intelligence letter for December 21, we discussed the potential for “pressure on options prices [to] remain through December.” In short, on the odds that “nothing happens through the holidays,” it made sense to sell implied volatility (IVOL) after CPI and FOMC targeting an end-of-month expiration.

The downward trajectory in IVOL remains intact in spite of some pockets of weakness under the hood in index heavyweights like Tesla Inc (NASDAQ: TSLA); expectations of future movement remain mute at both the index and single stock levels. As a result, short volatility trades (e.g., short straddle) in the indexes and near current market prices, expiring later this month, are doing really well.

Graphic: Retrieved from Kris Sidial. Tesla Inc (NASDAQ: TSLA) 1-month IVOL “relatively muted throughout the pain.”

Part of the equation resulting in this sideways market and tame IVOL environment was discussed in the December 21 letter. Today we add color.

In short, traders’ anticipation of a market drop, as evidenced by them reducing equity exposures into and through the 2022 market decline, coupled with the exploitation of loopholes manifesting increased demand for short-dated exposure to movements (i.e., gamma), and a supply of IVOL that is farther-dated, has put a lid on broad equity IVOL measures like the Cboe Volatility Index (INDEX: VIX) and pushed skew lower.

Consequently, hedges performing well have a lot of +gamma intraday and exposure to realized volatility (RVOL), and less exposure to longer-dated IVOL. The other side of this trade (and those who may be warehousing this risk) has exposure to -gamma and, to hedge that, they must act in a manner that exacerbates realized movement, hence RVOL’s meaningful outperformance.

In fact, RVOL in 2022 is nearly two times the level of RVOL in 2021, all the while the IVOL term structure is basically at the “same place it was a year ago,” according to Danny Kirsch of Piper Sandler Companies (NYSE: PIPR).

Graphic: Retrieved from Danny Kirsch, the head of options at Piper Sandler Companies (NYSE: PIPR). “Rolling 1 year realized volatility [for] … 2022 nearly 2x the level of 2021, speaks to long gamma and not vega for 2022.”

In a two-and-a-half-hour Twitter Spaces discussion, Kai Volatility’s Cem Karsan discussed what is the potential cause of this. Some of the blame rests on the way margin calculations (i.e., the loophole mentioned earlier); less cash must be posted if trades are closed the same day, basically. 

Anyways, at the macro level, yes, the trends continue. Generally speaking, IVOL is mute and not accounting for the activity in short-dated options, as discussed by The Ambrus Group’s recent paper, while RVOL is about two times the level it was in 2021, making +gamma profitable.

However, at the micro level, so to speak, as we started out this discussion, traders’ anticipation that “nothing happens through the holidays,” has resulted in the supply of short-dated volatility, boosting the stickiness of open interest at current market prices.

Let’s unpack this further and explain why this activity won’t continue forever.

Near current market prices sit large concentrations of options positions. For instance, we have the $3,835.00 SPX strike (the call part of a massively popular collar trade that is rolled every quarter). At $3,835.00 is the short strike of a big collar trade.

This means the trader (or fund owner) is short the call, hence -delta and -gamma. The other side (or counterpart) is long the call, hence +delta and +gamma.

In theory, the other side, in response to this exposure, will buy weakness and sell strength. In other words, to hedge a long call, the other side sells futures. If the market falls, the call’s delta will fall and become less positive. Therefore, the other side will buy back some of their initial futures hedges (reduce -delta from short futures) to neutralize delta risk. If the market rises, the other side will have more exposure to +delta. To neutralize the delta, the other side will sell more futures.

As a consequence, the market pins.

Graphic: Retrieved from Banco Santander SA (NYSE: SAN).

This is a trend, as we discussed on December 21, that likely continues through year-end. After year-end, the market is likely to “move more freely,” per SpotGamma, “because this options activity that is promoting mean reversion will no longer be there,” and, therefore, the indexes likely trade more “in sync with its wild constituents of the likes of Tesla and beyond.”

More on what’s next:

As Karsan dissected, yesterday, there’s a “liquidity premium” that’s getting crowded short; in this less well-hedged market environment, traders’ realization with respect to liquidity and collateral needs for supporting trading activities may provide the context for some sharp drops. But first, it’s likely (though not certain) the market experiences some relief. Knowing that the long-end is cheap (hence near-zero percentile skew) on a supply and demand basis, it does not make sense to sell options blindly out in time.

Technical

As of 6:30 AM ET, Wednesday’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 prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,857.00. 

Key levels to the upside include $3,879.25, $3,893.75, and $3,908.25. 

Key levels to the downside include $3,838.25, $3,813.25, and $3,793.25.

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.

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.

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 December 1, 2022

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. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

We will issue a content calendar, soon, revealing the dates letters are likely to be published and the content that may be covered. That said, due to the writer’s travel commitments, from 12/6 to 12/9 and 12/12 to 12/16 there will be no commentaries. If any queries, or if you are local to New York City or Paris, ping renato@physikinvest.com or Renato Capelj#8625 on Discord.

Reflections

Fundamentally, our Wednesday letter pointed to some macro-type forces creating an uncertain context for traders.

Key crosswinds are numbered (1-4).

Alongside (1) easing financial conditions, the markets roared higher with boosts coming from (2) a “vol crunch” and “systemic exposure reallocation,” Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott November 28, 2022, said.

Our November 30, 2022 letter noted Morgan Stanley (NYSE: MS) strategists were seeing a (3) “contraction … [or] squeezing of liquidity that, alone, implies an 8% drop for the S&P 500.”

Strategists JPMorgan Chase & Co (NYSE: JPM) agreed: 

On “a significant decline in corporate earnings, at a time of higher interest rates (implying lower P/Es and lower prices relative to the 2022 lows), … [a] market decline could happen between now and the end of the first quarter of 2023.”

With (4) “the financial system … evolved around an environment of near-zero interest rates, … [built up] market interdependencies … can cause selloffs” that feed on themselves (i.e., large market drops statistically add to the likelihood of further large drops).

In light of the above (1-4) crosswinds, we took a step back and asked: 

How do we get bullish – particularly if policymakers ease the pace of rate increases – and not lose much money if the market falls, or position ourselves for the drop many expect?

Graphic: Retrieved from Bloomberg.

To quote our November 30, 2022 letter, the Nasdaq 100’s (INDEX: NDX) “volatility skew … was smile-shaped, … making for some great trades to the upside,” we said, adding: “we can use the richness of further away calls to reduce the cost of our bets on the market upside.”

Graphic: Updated 11/28/2022. Retrieved from Interactive Brokers (NASDAQ: IBKR). Nasdaq 100 (INDEX: NDX) volatility skew resembles the so-called smile.

The sample trade provided: 500-1000 points wide call ratio spreads (buy the closer leg, sell two of the farther legs) expiring in fifteen days may work well (e.g., SELL -1 1/2 BACKRATIO NDX 100 16 DEC 22 [AM] 13425/13925 CALL @.20 CR LMT). 

The trade’s key greeks (+Delta and +Gamma) suggested upside would result in profit. The NDX did rise, and the sample trade priced as high as +2,000%. Adding, as sized by the letter writer, if NDX -10.00%, the loss was limited to $60.00. If the NDX +10.00%, with other conditions the same, profit ~$12,000.00. 

Graphic: Retrieved from the Charles Schwab Corporation-owned (NYSE: SCHW) thinkorswim platform. Nasdaq 100 options prices. 

Back to the present. What now?

With news that China is loosening its grip on Covid, and the Federal Reserve seeing inflation fall in some parts of the economy (despite markets showing the terminal rate at ~5.20% next spring) ahead of PCE inflation updates this morning, there is a chance for follow-on bullishness.

Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade thinkorswim. Observed is the Eurodollar, the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates).

So, what is the takeaway?

The purpose of this letter, though it seems we venture beyond it at times, is to ponder theory as well as generate actionable trade ideas based on the application of theory to recent happenings. 

Though there are factors that may skew the expected distribution of returns one way or another, a trade is a coinflip; your bet either works or it does not. Using the factors of volatility and time to our advantage may lower the risk and cost of bets, in case they do not pan out.

In short, we don’t know if up or down, but we can use market context to lower our costs and live to fight another day! See you later.

Technical

As of 7:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the 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 $4,069.25. 

Key levels to the upside include $4,093.00, $4,122.75, and $4,136.75. 

Key levels to the downside include $4,049.25, $4,024.00, and $4,000.25.

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.

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.

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

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.

Disclaimer

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

Categories
Commentary

Daily Brief For November 18, 2022

Physik Invest’s Daily Brief is read by over 1,200 people. To join this community and learn about the fundamental and technical drivers of markets, subscribe below.

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Graphic updated 9:00 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. 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. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

A short commentary today after Wednesday’s detailed letter. Take a look at that letter and, some of the below, for context on what we are likely to discuss next. If you are pressed for time, focus on the bolded statements. Have a good weekend!

Positioning

Keeping with the spirit of Wednesday’s ultra-detailed newsletter.

A key point in that letter was traders’ increased activity across short-term options and “anchoring to key areas such as $4,000.00 in the S&P 500.” This activity, in the face of a multi-week price rise, told us a lot about the state of the market. In short, the bigger participants, some of whom move by a committee and seldom respond to technical nuances, were probably waiting for more information before entering.

For that reason, our key S&P levels, quoted in recent letters, are holding.

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

That’s part of the big point we have attempted to get across, recently. Traders “have been flocking to short-dated contracts to cope with the market whiplash of late, an activity that has exerted outsize impact on the underlying equities,” per Bloomberg. Per data shown by SpotGamma, concentrations in these options have prompted pinning near key areas like $4,000.00 in the S&P, before its descent on Thursday.

You can go to Wednesday’s letter for the detailed explanation but, in short, the reach for positive exposure to the upside (+Delta) lent to recent market relief. Then, per the sales of volatility, just this last week, the sentiment changed to a wait-and-see stance.

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

As already stated, this wait-and-see stance was expressed through short-dated options that are highly sensitive to changes in direction (i.e., these options can go from having a lot of value or Delta to little, over a short window of time). This sensitivity is expressed via the higher Gamma of near-the-money options.

Graphic: Retrieved from Bloomberg.

For a quick check of how sticky these areas may be, one has to look at the level of +Gamma which has been on an uptrend.

As traders wait for more information and take bets against the market movement (i.e., volatility is sold or -Gamma) counterparties take on more +Gamma (i.e., their side of the bet does better when the market moves).

In hedging this +Gamma, counterparties reduce market movement (i.e., counterparty buy call and sell [buy] futures into price rise [dip]).

The shorter-dated the options, the more sensitive they are; options values (or Delta) can rise or fall quickly as Gamma increases when time passes. That may mean that the reaction results in movement reducing (further), and pinning near key areas.

Again, see Wednesday’s ultra-detailed newsletter for more detail.

Graphic: Taken from Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading. 

Another consequence, as picked up by individuals online including Darrin John, the S&P 500’s realized volatility (RVOL) “is so high” with “a basket of 500 of the ‘best’ stocks in the US [wildly] swing[ing] +5% in a single day,” while the S&P 500 is relatively mute, or your letter writer sees it.

That’s because of the following:

If there are forces that are pinning the S&P 500, all the while there are arbitrage constraints connecting its wilder components (in which traders are more uncertain and actively betting on direction and hedging), then correlation must suffer.

Graphic: Retrieved from Bloomberg.

In the face of brewing uncertainties, reflected in index put options activity that has translated “to an uptick in open interest at $3,900.00 and $3,950.00” in the S&P 500, per SpotGamma, -Gamma has increased.

Graphic: Retrieved from Bloomberg. Via Goldman Sachs Group Inc (NYSE: GS). “Broadly, hedge funds’ net leverage, a gauge of risk appetite that measures the industry’s long versus short positions, sat in the 24th percentile of a one-year range, Goldman data show.”

If you take the statements about +Gamma above and reverse them, the opposite happens. With less +Gamma in the market, the result is less dislocation and index movement that is more in line with its wilder underlying components, hence the measured whipsaw, yesterday.

Anyways, today there’s a “$2.1 trillion options expiration” that will clear the deck of some of that sticky +Gamma we talked about earlier. Per SpotGamma, dealers are likely to react in a manner that “allows the market to move more.”

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

One could construe that as bearish but it may pay more to not do so. The market is trading in a period during which there’s less liquidity. That may mean this hedging, for one, may result in continued support. The Holiday period pulls forward Delta buyback linked to options’ decay with respect to the passage of time (Charm). Therefore, per SpotGamma, weakness after expiration likely is contained.

“The potential for more violent downside (i.e., new YTD lows) increases into the end of the month and early December due to the large December options expiration.”

Graphic: Retrieved from SpotGamma.

For that reason, with “[l]​​ow skew and vol-of-vol,” entering trades that are convex and change non-linearly with respect to changes in underlying implied volatility (IVOL) and direction, are attractive.

That’s because of the following dynamics:

When you think there is to be an outsized move in the underlying, relative to what is priced, you buy options (+Gamma). When you think there is to be an outsized move in the implied volatility, relative to what is priced, you buy options (+Volga). If there is a large enough change in direction (RVOL) or IVOL, you may make money.

Graphic: Retrieved from Banco Santander SA (NYSE: SAN).

Technical

As of 9:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the 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 $4,000.25. 

Key levels to the upside include $4,027.00, $4,069.25, and $4,136.75. 

Key levels to the downside include $3,965.25, $3,923.00, and $3,871.25.

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.

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 writes options market analyses at SpotGamma and is a Benzinga journalist. 

His past works include private discussions with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, the infamous Sam Bankman-Fried of FTX, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, the Lithuanian Delegation’s Aušrinė Armonaitė, among many others.

Contact

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 11, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 1,200+ that read this report daily, below!

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Graphic updated 8:45 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 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

A light letter. We’ll go into far more detail to start next week. See you, then!

Positioning

Assets rallied following a downside surprise in figures for headline annual inflation. Some policymakers also expressed a view that the pace of rate hikes could slow.

Graphic: Retrieved from Bloomberg. It’s not a coincidence that the most-shorted stocks of 2022 posted their biggest rally since 2020.

Barring the worst case, the stage was set for relief. Traders sought protection, as evidenced by a persistent bid in implied volatility (IVOL), which compounded the pressures of de-grossing.

Graphic: Retrieved from Bloomberg.

There was a “clustering of vol[atility] demand to hedge” elections and CPI, per Kai Volatility’s Cem Karsan. On the back of that, “the potential Vanna flows that [would] come from these events” are very positive.

Per SpotGamma, when “nothing bad happen[ed], and traders close[d] those puts, that … bolster[ed] [upside].”

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

Karsan adds the market is entering a period during which there’s less liquidity to absorb decaying protection with respect to time (Charm).

This may drive (bullish) seasonality.

Risks are brewing, though. The very poor hedging heading into this next rally may set the stage for a violent downside. Traders not well-hedged may seek protection when something bad happens, and this will compound macro-type sales, particularly if the activity is in options with less time to expiration (note the below graphic).

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM) via Bloomberg. “There is indeed some market impact on the SPX from [ultra-short-dated options],” the team wrote. 

Technical

As of 7:45 AM ET, Friday’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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Any activity above the $3,964.75 HVNode puts into play the $4,001.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,069.25 HVNode and $4,136.75 MCPOC, or higher.

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

Any activity below the $3,964.75 HVNode puts into play the $3,913.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,871.25 and $3,838.25 LVNode, 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 builds on high-volume (HVNodes) areas.

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 low volume, 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.

Categories
Commentary

Daily Brief For November 8, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 1,200+ that read this report daily, below!

Subscribe
Graphic updated 9:15 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 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

This letter’s author is ramping up coverage and returning to speed after a short hiatus. Today’s focus will be on adding to the “Positioning” section of Monday’s letter.

Positioning

After some late-October weakness that is coinciding with the Federal Reserve’s (Fed) decision to raise rates, stocks are tame. This is heading into midterm elections, today, and inflation updates, Thursday.

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

Republicans are likely to add to their control of the House and Senate.

Having fewer Democrats in Congress would lower “the odds of fiscal measures [that would] embolden a hawkish Federal Reserve.” 

This is a boon for stocks.

Graphic: Retrieved from Bloomberg. “With things looking that bad, current polls show the Democrats appear to be headed for a drubbing, almost certain to lose control of the House and increasingly likely to see the Senate slip away.”

Indeed, Wells Fargo & Co (NYSE: WFC) strategists found a “GOP-controlled Senate historically is associated with superior equity returns.”

Graphic: Retrieved from Wells Fargo & Co (NYSE: WFC).

In spite of recessions, even, the S&P 500, a year after midterms, often netted positive 20% or so returns Citigroup Inc (NYSE: C) strategists add.

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm. The “seasonal/cycle outlook is for a lower low or retest of the lows over the next three months as we are in the worst two months of the year and are smack dab in the *Weak Spot* of the 4-Year Cycle”

A post-election bump is on top of the general positiveness of equity performance during the earnings season and periods of strong pessimism as we have today.

Graphic: Retrieved from Mr. Blonde’s Stuck in the Middle letter.

Why all the potential positivity over this short period?

The aforementioned events are happening during a period wherein market liquidity eases (i.e., the holiday season).

It’s during this period, from a positioning perspective, the effects of decay (which we discuss more below) accelerate, and a lack of liquidity, according to Kai Volatility’s Cem Karsan, makes markets sensitive to positive-leaning flows.

Pessimism and hedging may indirectly give rise to bullishness. Why is that?

Demand for options exposures, especially across shorter time horizons, evidenced by heightened implied volatility (IVOL) at the front end (see below), has indirectly added to the pressures of de-grossing, as observed.

Graphic: Retrieved from Bloomberg.

Though positioning is generally thin, as we also talked about in yesterday’s newsletter, thus reducing the impact of the hedging of this positioning, demand remains “strong,” per Karsan, and “dealers are short that volatility.”

Derivatives strategists at the likes of the Royal Bank of Canada (NYSE: RY) agree with Karsan’s remarks; Amy Wu Silverman said that the Cboe Volatility Index’s (INDEX: VIX) elevation was the result of demand for hedges after October options expiry.

“Part of today’s move at least is a function of new positions. There is likely demand for future months since we just went through October options expiry,” she said. “Part of it is a function of the ‘floor’ of a new volatility regime.”

So, what’s the point to make?

For IVOL measures to remain wound, something bad needs to happen, in short.

Otherwise, per SpotGamma, a “decline in IVOL … can aid in a push-and-pull that actually serves to … resist far-reaching weakness” and keep selling orderly.

That’s because, from here, the removal of the protection that’s been demanded in the past days and weeks compounds the sped-up effects of Charm.

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.

Charm, which is the change in options Delta (i.e., exposure to direction) with respect to changes in time, “drives a positive window or seasonality”; “the reduction in time” and “lack of liquidity” make markets more sensitive to those positive flows.

Graphic: Retrieved from SqueezeMetrics.

In the long term, however, weakness is here to stay. Poor IVOL performance and little skew also likely set the stage for a post-holiday tail. More on this, later.

Graphic: Retrieved from Corey Hoffstein on Twitter.

Technical

As of 6:45 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, just outside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

If above the $3,806.25 LVNode, the $3,845.00 VPOC is in play. Initiative trade beyond the latter could reach as high as the $3,874.25 HVNode and $3,909.25 MCPOC, or higher.

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

If above the $3,806.25 LVNode, the $3,787.00 VPOC is in play. Initiative trade beyond the latter could reach as low as the $3,727.00 and $3,685.00 VPOC, 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.

Considerations: Futures tied to the S&P 500 are trading within close proximity to a blue line in the above graphic. This blue line depicts a volume-weighted average price (VWAP) anchored to price action following the release of consumer price data on September 13, 2022.

The VWAP metric is highly regarded by chief investment officers, among other participants, for the quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Should the S&P 500 auction away from this level, and come back to it, a prudent response is to fade. If the price is above the VWAP, and it auctions lower, into the VWAP, traders would buy. On the other hand, if the price is below the VWAP, and it auctions higher, into the VWAP, sell.

At this time, the S&P 500 is near VWAP offering traders lower (directional) opportunities.

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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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.

Categories
Commentary

Daily Brief For October 4, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 990+ that read this report daily, below!

Subscribe
Graphic updated 9:20 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 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

Fresh and top of mind, still, is the Credit Suisse Group AG (NYSE: CS) debacle. However, despite the bank’s “critical moment,” as discussed in yesterday’s letter, credit default swap (CDS) levels, though still rising, are “far from distressed.”

Graphic: Retrieved from Reuters.

Adding, not reflected by the stock is a “strong capital base and liquidity position,” per CS.

Graphic: Retrieved from Credit Suisse Group AG (NYSE: CS).

A big topic speculated on was CS’ probability of default. At its core, CDS spreads relate to the probability of default in the following way, per Deutsche Bank AG (NYSE: DB) research: 

(CDS Spread) / (1 – Recovery Rate) = Implied Probability Of Default.

The recovery rate is basically the (estimated) amount of a loan that will be repaid in the case of a bankruptcy or default. Per European Central Bank research, “the standard recovery rate used by the industry in price calculations is 40%.”

Roughly speaking, below is a quick calculation:

250 basis points / (1 – 0.40) = 416.67 basis points = 4.17% Implied Probability Of Default

In CS’ case, if the spread is 250 basis points, assuming a 40% recovery, that’s a 4.17% default probability implied. If the spread was at 150 basis points, then, assuming a 40% recovery, that’s a 2.5% chance of default.

Graphic: Taken from @EffMktHype who retrieved from Bloomberg. “So many [Bloomberg] screenshots of CS CDS levels and talking about massive default prob numbers. Zero people actually using [the] same terminal to look at default risk screen.”

Taken together, in short, similar to as we put forth, yesterday, “[t]his is not 2008,” per Citigroup Inc’s (NYSE: C) Andrew Coombs. Bloomberg adds that Morgan Stanley (NYSE: MS) faced its own credit spread debacle during 2011 European debt exposure rumors; “it took months for the price of the default swaps to fall as the feared losses never materialized.”

Graphic: Retrieved from Reuters.

Ahead of an October 27 CS review covering topics including “a large-scale investment banking retreat, … [i]nvestors are worried about how much the bank will [have to] cover” a restructuring.

Bloomberg adds: “A sale of Credit Suisse’s structured-products group, which trades securitized debt, has attracted interest from potential buyers, … [amid] rising interest rates.”

Per UBS Group AG (NYSE: UBS) research, a sale of such businesses, which may be worth more than the market is currently implying, “could help to avoid a dilutive capital increase.”

Positioning

“Month-end portfolio rebalances and [the] expiration of quarterly option strategies [acted] in support of the market,” JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic stated in a September 30, 2022 commentary titled “Throwing rocks in glass houses.”

In that same commentary, Kolanovic eased support for his 2022 price targets on economic volatility led by central banks, the war in Europe, and beyond.

As stated last week, per Kai Volatility’s Cem Karsan, it’s the case that the removal of options strategies and potential supply of protection (as investors further come to the realization that options protection has done little to protect against downside) may provide markets a boost.

Graphic: Taken from @Alpha_Ex_LLC who retrieved from Bloomberg. S&P 500 (INDEX: SPX) October put option lower in price and volatility.

Ultimately, though, a final resolution would be “tied to the incremental effects on liquidity,” (e.g., QT manifesting itself as “$4.5 billion less in demand for assets per day,” and buyback blackout) while options repositioning may make the case for increased fragility, as traders’ falling demand for put protection opens the door to less supportive hedging flows with respect to time (Charm) and volatility (Vanna) changes.

Graphic: Retrieved from SqueezeMetrics.

Therefore, trades such as the Short Ratio Put Spread, particularly if narrower, may be far riskier to employ into the end of this year and the middle half of next year. For context, this was a trade to have on this year.

As participants continue to make the aforementioned realizations and supply to the market put (downside protection), tails may “continue to be cheap,” and discount “crash risk,” according to The Ambrus Group’s Kris Sidial.

A lot more to resolve this jumbled mess of a newsletter in the coming days.

Technical

As of 9:10 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 prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Any activity above the $3,771.25 HVNode puts into play the $3,826.25 HVNode. Initiative trade beyond the last-mentioned could reach as high as the $3,862.25 HVNode and $3,893.00 VPOC, or higher.

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

Any activity below the $3,771.25 HVNode puts into play the $3,722.50 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,671.00 VPOC and $3,610.75 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.

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 12, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 900+ that read this report daily, below!

Subscribe
Graphic updated 7:30 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 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

Hey team, before we get started, let’s address the mismatch some observed last week with this letter’s levels and S&P quotes, versus what they saw at home. 

It is basically the case that our charting platform rolled over to the December S&P 500 Index futures contract on September 9, 2022. This was about 1-week ahead of the expiry of the old contract on September 16, 2022.

Going forward, unless otherwise noted, 6-days prior to the expiration of a quoted contract, the levels and prices in this letter may reflect that of the new, father-dated contract.

As an aside, based on CME Group Inc’s (NASDAQ: CME) Equity Quarterly Roll Analyzer Tool, the pace of the E-mini S&P 500 (FUTURE: /ES) roll is far off of what it has historically been at this stage of the roll period. 

This roll, too, caught your letter’s writer by surprise. Sorry!

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

Moving on, coverage this week may be sporadic due to some uncertain travel commitments. It is seeming very likely that there may not be a letter published on September 13 and 14, 2022.

Fundamental

Let’s get into it.

At its core, there’s a lot of stuff happening on the monetary and fiscal front. Guiding some of this action, on those fronts, are (geo)political happenings, the rising tide of populism, and beyond.

On the political fronts, Ukrainians “broke through weakened Russian lines, seizing the strategic railway hub of Kupiansk and the key staging area of Izyum,” Noah Smith explained in his letter.

Recent happenings illustrate “some important principles about the broader conflict unfolding across our world between liberalism and illiberalism,” as well as what a “successful defense of Ukraine” would do to hurt “the dawn of a new age of imperial expansionism,” something we’ve talked a lot about in past letters, alongside the growing deglobalization pulse.

The go-to on the implications of these conflicts, as well as the “burgeoning monetary order,” dubbed Bretton Woods III, has been Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who thinks the dollar “is entering a new and rockier phase” and what “matters more than access to dollars is access to commodities and actual things.”

From hereon, Pozsar thinks “commodity prices can go much higher, … and a dollar can get devalued in terms of commodities.”

In the face of geopolitical and supply chokepoints (further bolstered by such things as railroad strikes), as well as the fragmentation of “the physical world,” it’s no “longer appropriate to think about the world as a unified whole,” Pozsar explains.

Potentially at hand is a “self-reinforcing ‘dollar doom loop,’” Jon Turek of JST Advisors adds in the earlier quoted article. That’s big since, as we once explained, the dollar is the dominant currency for carry due to the easy monetary policies that removed the risk of a strong dollar. 

“Non-US entities make dollar-based loans and transactions … because it’s considered more trustworthy than native fiat,” Bankless explained. “When there’s a disruption in global cash flows, there’s effectively a short squeeze on the dollar.” 

Therefore, while efforts to stem inflation bolstered by supply chokepoints continue, “the stronger the dollar gets in comparison, the less tenable it becomes as a global reserve.”

That is pressure on the long-term trajectory of the dollar.

Ultimately, through the earlier mentioned developments, “breaking the dollar’s dominance could arguably help some countries avoid a tightening of financial conditions,” Bloomberg explains.

Accordingly, with “the dollar’s peak [] already in the rearview mirror,” concerns are amped in regard to how this impacts U.S. markets. It’s the case that U.S. market liquidity, as well as the dollar’s strong role as a reserve, put the S&P 500 at the center of the global carry regime. 

Thus, an unwinding of carry may compound a market drop affecting nearly all risk assets, even housing, and prompting recession, something we shall unpack further in coming letters.

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS). “MS Research thinks the lows for this bear market will likely arrive in the fourth quarter with 3,400 the minimum downside and 3,000 the low if a recession arrives.”

To round out this section, a bull case is likely characterized by less outsized interest rate hikes here, in the US, with quantitative tightening (QT) ramping “to its maximal caps” with no increase in “vol or yields,” said JPMorgan Chase & Co (NYSE: JPM) market intelligence.

Graphic: Retrieved from Bloomberg.

However, if inflation remains hot – 8% and 9% – and supply disruptions remain sticky, the Fed may continue on its path of higher for longer. That means an “outsized rate hike cadence in Nov/Dec, bringing Fed Funds above 4.0% … and QT put[ting] upward pressure on yields.”

Graphic: Retrieved from Callum Thomas. Via Bank of America Corporation (NYSE: BAC). Market bottoms often appear when the Federal Reserve (Fed) begins cutting interest rates.

Positioning

Demand for protection and re-entry into shorts was the context for selling that culminated in an S&P 500 (INDEX: SPX) low at $3,900.00 last week. 

It’s at this level, “where the demand for put options was concentrated,” analysis providers like SpotGamma saw “support” and, “absent an exogenous catalyst,” S&P 500 stability.

From thereon, into the end of the week, SpotGamma adds that “positive delta hedging flows” bolstered a “market move away from the $3,900.00 support.” Tools like SpotGamma’s HIRO showed volatility selling and this validated a SpotGamma call for “follow-on bullishness.”

Graphic: Retrieved from SpotGamma. Updated September 7, 2022.

Nonetheless, in light of the above fundamental and positioning contexts, after derivatives expiries this month, the stage is likely set for larger two-way ranges.

Technical

As of 7:20 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 balanced overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Any activity above the $4,107.00 POC puts into play the $4,136.75 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $4,189.25 LVNode and $4,231.00 VPOC, or higher.

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

Any activity below the $4,107.00 POC puts into play the $4,071.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,018.75 HVNode and $3,991.00 VPOC, 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.

Categories
Commentary

Daily Brief For August 18, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 800+ that read this report daily, below!

Subscribe
Graphic updated 7:20 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.
Hey team – the Daily Brief will be paused until August 29, at least, due to Renato’s travel commitments. 

Apologies and thank you for the support!

Positioning

As of 7:20 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.05%. Net Gamma exposures (generally) rising may promote tighter trading ranges.

Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.

As an aside, real quick, in a rising market, characterized by demand for call options, those who are on the other side of options trades, hedge in a manner that may bolster the upside (i.e., the naive theory is that if customers buy calls, then counterparties sell calls + buy stock to hedge).

That said, if IVOL drops, liquidity providers’ out-of-the-money (in-the-money) Delta exposures drop (rise) and, thus, they will sell (buy) underlying hedges which may pressure (support) the advance or play into pinning action, as seen over the past week or so at the $4,300.00 options strike, at which there is a lot of open interest and volume, in the S&P 500.

Read: The Implied Order Book by SqueezeMetrics for a sort-of detailed primer on this.

Graphic: Updated 8/15/2022. Retrieved from SqueezeMetrics.

Given realized (RVOL) and implied (IVOL) volatility measures, as well as skew, it is beneficial to be a buyer of options structures to protect against (potential) downside (e.g., S&P 500 [INDEX: SPX] +1 x -2 Short Ratio Put Spread | 200+ Points Wide | 15-30 DTE | @ $0.00 or better).

This is not to say that call options, which we said could “outperform” their Delta (i.e., exposure to direction) weeks ago, are out of favor (note: this is the case for something such as an SPX, not a Bed Bath & Beyond Inc [NASDAQ: BBBY]).

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

No! On the contrary, Goldman Sachs Group Inc (NYSE: GS) strategists say “call premiums are attractive.” This is “evidenced by [their] GS-EQMOVE model which estimates 33% probability of a 1-month 5% up-move versus only 13% implied by the options market.”

A quick check of implied volatility skew, which is a plot of the implied volatility levels for options across different strike prices, shows a smile in the shortest of tenors, rather than a usual smirk.

Graphic: Retrieved from Cboe Global Markets Inc (BATS: CBOE).

Given this, the options with strike prices above current market prices are seemingly more pricey than those that have more time to expiration. One could think about structuring something like a Short Ratio Call Spread or, even, a Long Call Calendar Spread at or above current prices. 

In the latter, any sideways-to-higher movement would allow for that spread to expand for profit.

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.

Context: Participants’ proactive hedging of positive Delta equity exposure, via negative Delta put option exposures, as well as the monetization of those hedges into the decline, resulted in poor performance in IVOL metrics like the Cboe Volatility Index (INDEX: VIX).

Therefore, per the Cboe, it’s the case that “since the launch of the VIX Index, the past six-month period has been the weakest for volatility in 29 years, relative to similar [SPX] price moves.”

Accordingly, its structures we thought would work best, given the potential for measured selling, which others thought would carry a lot of risks, such as Short Ratio Put Spreads, that performed best, seen below.

Graphic: Via Pat Hennessy. “[T]he performance of short-dated 1×2 put ratios in SPX this year. Despite being short the tail, the grind lower has been well captured by this trade structure.”

Moreover, it’s the case that after a nearly 20% multi-month run, higher, markets are stretched. 

To continue this pace would require, per JPMorgan Chase & Co (NYSE: JPM) strategists, a continued interest in demand for positive Delta exposure via equity or options, lower prints of consumer price data, as well as a dovish Federal Reserve (Fed) inflection.

The former we see now via call option volumes. The latter, not so much as the Federal Open Market Committee (FOMC) minutes “left the door open to another ‘unusually large’ increase at the next meeting in September,” in spite of a commitment to dial back if the data supported.

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.

Presently, retail sales are steady, and supply pressures, though starting to ease, remain, bolstering inflation which the Fed is ultimately trying to stop from becoming entrenched.

Graphic: Retrieved from Bloomberg.

Though there are fundamental contexts we are leaving out (e.g., negative earnings revisions, Chinese retail, industrial output, and investment data missing which prompted an easing, the use of tools like Treasury buybacks to ease disruptions via Fed-action, as well as increasing recession odds), in short, the focus should be on the technicals which actually make us money.

Graphic: Retrieved from The Market Ear. Via Bank of America Corporation (NYSE: BAC).

And, presently, on the heels of macro- and volatility-type re-leveraging, per Deutsche Bank AG (NYSE: DB) the technical contexts are bullish. 

Keith Lerner, the co-chief investment officer and chief market strategist at Truist Financial Corporation’s (NYSE: TFC) Advisory Services puts it all well:

“Even if the Fed does pivot, they are less likely to support the markets as quickly as they have in the past given the scar tissue left behind as a result of the inflation challenges of the past year… The market rally over the past four weeks has been nothing short of impressive. Such strong buying pressure following indiscriminate selling has historically been a very positive sign for the market, often following important market bottoms. This is a welcome sign. Still, other factors in our work are less supportive. Indeed, markets are not only fighting the Fed, but the most aggressive global monetary tightening cycle in decades.”

Graphic: Retrieved from Bloomberg. Via Truist Financial Corporation (NYSE: TFC).

Beyond this, from a volatility perspective, we’d look for the VIX to sink below 15 to increase our optimism over a “sustained [and] better-than-typical” rally, per Jefferies Financial Group Inc (NYSE: JEF). Look at this last remark through the lens of participation on the part of traders who employ volatility-targeting strategies, for instance.

Graphic: Retrieved from The Market Ear. Via Jefferies Financial Group Inc (NYSE: JEF).

Technical

As of 7:20 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 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 $4,273.00 VPOC puts into play the $4,294.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,337.00 VPOC and $4,393.75 HVNode, or higher.

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

Any activity below the $4,273.00 VPOC puts into play the $4,253.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,231.00 VPOC and $4,202.75 RTH Low, 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.