Categories
Commentary

Daily Brief For October 11, 2021

Editor’s Note: The newsletter schedule has changed.

From now on, you can expect to see Daily Briefs only – Monday through Friday – posted shortly before 8:00 AM ET. The Weekly Trade Idea will be packaged into Monday’s commentary, also.

Thanks again for your continued support. I strive to simplify and add value, as best I can.

Market Commentary

Equity index futures trade sideways to lower with bonds. Commodities were mixed.

  • October bottom; a rip up into EOY?
  • Ahead: No economic reports today.

What Happened: Ahead of a busy start to the third-quarter earnings season, this week, U.S. stock index futures auctioned sideways to lower overnight alongside some mixed narratives.

Last night, it was revealed that Goldman Sachs Group (NYSE: GS) cut its U.S. growth forecast on consumption and a fiscal slowdown. Not even a day later, there is news that Goldman, alongside JPMorgan Chase & Co (NYSE: JPM) strategists, suggests the recent dip is a buy.

Given the Columbus Day holiday, today, no economic reports are scheduled.

Graphic updated 6:20 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: As of 6:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Further, during the prior week’s trade, on mostly strong intraday breadth and divergent market liquidity metrics, equity index futures established a rounded bottom and minimal excess low.

Then, a swift recovery ensued; initiative sellers lacked the wherewithal to take prices lower, beyond the S&P 500’s $4,363.25-$4,278.00 balance area. Initiative buyers were then emboldened, expanding range and value the opposite way.

During this recovery process, the S&P 500 – as evidenced by p-shaped emotional, multiple-distribution profile structures – established a minimal excess high before momentum from covering shorts was overpowered by responsive selling at key areas of resting liquidity, at and around /ES $4,410.25 (SPY $441.00), the site of a key anchored volume-weighted average price (VWAP) level.

Note: Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Friday’s session succumbed to divergences in buying and selling power as calculated by the difference in volume traded at the bid and offer, resolving some of the aforementioned emotional structures through what’s called the “cave-fill” process. 

During this process, participants revisited, repaired, and strengthened – building out areas of high volume (HVNodes), or value – areas low volume (LVNodes).

Note: The cave-fill process widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

Moreover, September’s seasonally-aligned weakness saw the Nasdaq 100 lead lower. Last week – alongside improvement amongst some positioning metrics – the tone shifted with the cash-settled Nasdaq 100 (INDEX: NDX) rising 4.35% versus the S&P 500 (INDEX: SPX) rising 3.25%.

That comes as October traditionally marks an end to weakness amidst a cycle of rebalancing and earnings; according to LPL Financial Research, “Stocks rise 3.8% on average during the fourth quarter, but the past seven times the S&P 500 was up 15% year-to-date heading into the home stretch of the year, the fourth quarter was higher every single time, up a very impressive 5.8%.” 

“Earnings for the third quarter should again be strong and mostly outpace expectations,” Leuthold Group chief investment strategist Jim Paulsen adds. “Hours worked in the third quarter rose by about 5% suggesting real GDP for the quarter may be close to 7%. With most companies reporting strong pricing power, solid real GDP growth should result in another surprisingly strong corporate earnings season.”

Graphic: LPL Financial Research unpacks S&P 500 seasonality.
Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. Spending more than a few hours of trade above trend, VWAP (yellow), and the 61.80% Fibonacci retracement suggest good odds of upside continuation.

Notwithstanding, some risks to be aware of include the Federal Reserve’s tapering initiatives and the prospects of a rise in the Fed funds rate, amidst hot sentiment, a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma.

“What we see in the equity space is a lot of sensitivity to higher real yields,” Joseph Little, chief global strategist at HSBC Holdings Plc (NYSE: HSBC) Asset Management, said. “We are seeing policy normalization everywhere. That creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance.”

Graphic: A “gentle reminder of the fact tapering matters,” via The Market Ear.
Graphic: Sentiment elevated, “generating a 96% historical probability of down markets in the next 12 months at current levels.”

In addition, to balance some of our Q4 bullishness, in a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: September 30 “was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,363.25 high volume area (HVNode) puts in play the $4,393.00 untested point of control (VPOC). Initiative trade beyond the $4,393.00 VPOC could reach as high as the $4,415.00 VPOC and $4,437.75 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,363.25 HVNode puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 low volume area (LVNode) and $4,299.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:20 AM ET.

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.

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.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

News And Analysis

Banks bought epic amounts of safe assets; forget inflation.

The Fed is likely to side with growth and keep policy easy.

Merck seeks emergency use authorization for COVID pills.

Europe Economic Snapshot: Faster-than-expected restart.

Latin America settles into new post-pandemic slow growth.

S&P talking stock-flow confusion again – QE and tapering.

What People Are Saying

Weekly Trade Idea

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For September 26, 2021

Editor’s Note: Market commentaries to pause until Monday, October 4, 2021, due to travel commitments. As a result, I go in-depth today and offer a strong trade idea for the week ahead.

Also, if you’re in a rush, focus on the bolded text!

Market Commentary

Equity index futures recover. Yields break higher. Volatility implodes.

  • Indices have recovered 60% of sell-off.
  • Buying-the-dip psychology is breaking.
  • Watching: Taper, shutdown, debt risks.
  • Fed may stamp out life in the economy.
  • Trade Idea: Capitalizing on TSLA skew.

What Happened: After a series of outlier moves, U.S. stock index futures ended the week range-bound when responsive sellers – as confirmed by measures of market liquidity – stepped in at key moving averages and anchored volume-weighted average price levels.

Ahead is a busy week in terms of economic releases; important data on durable goods orders, consumer confidence, home sales, personal income and spending, PCE deflators, as well as manufacturing data are slated to come out.

Graphic updated 9:00 AM ET Sunday. 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. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: Be patient with me, there is a lot to condense. 

During the prior week’s trade, on mostly strong intraday breadth and divergent market liquidity metrics, equity index futures briefly liquidated; the S&P 500 went as low as $4,300.00. 

Then, a swift recovery ensued; participants took back nearly 60% of the most recent sell-off.

During the recovery process, the S&P 500 – as evidenced by emotional, multiple distribution profile structures – established a minimal excess rally high at $4,455.00 before the momentum from covering shorts was overpowered by responsive selling at key areas of resting liquidity, at and around $4,455.00, or so. 

Friday’s session, however, resolved some of the aforementioned emotional structures through what’s called the “cave-fill” process; revisiting, repairing, and strengthening – building out areas of high volume (HVNodes), or value – areas low volume (LVNodes). 

To put it simply, the cave-fill process widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

Further, the aforementioned trade is happening in the context of narratives surrounding a taper to Federal Reserve asset purchases, a government shutdown, and the debt ceiling.

The implications of these themes on price are contradictory; to elaborate, in the most recent meeting of the Federal Open Market Committee (FOMC), it was announced that the economy made substantial progress toward the central bank’s goals and, if progress continued as expected, a moderation in the pace of asset purchases was likely. 

“Powell said that the tapering process could be wrapped up by mid-2022, which would require either an earlier start or larger reductions,” Moody’s said. 

“In other words, as long as September employment isn’t a disaster, the Fed will begin tapering at its November meeting. Therefore, it would skip a formal announcement and a one-meeting delay to dive right into the tapering process. It seems we’re headed for an eight-month taper, or [a] $15 billion reduction per month.”

The Fed’s dot plot saw movement, too; there are increased odds of a rate hike in 2022.

In regards to the debt ceiling, which caused a kink in the Treasury bill curve and may portend financial market volatility if not resolved, Powell voiced concern, noting that it must be raised. 

This is a likely development given that “lawmakers know that voting against raising the debt ceiling would have enormous economic costs,” Moody’s noted.

Graphic: “​​The spread between 5- and 30-year yields dropped below 100 basis points after the FOMC meeting, for the first time since just before last year’s Jackson Hole’s conference. Such a flat curve … signal[s] that the bond market thinks the Fed is going to make a hawkish mistake, and stamp out the life in the economy when previously there had been a belief that the Fed would be easy and let inflation move higher.” The source is Bloomberg.

Adding, after the September 17 options expiry which cut S&P 500 dealer gamma in half and opened the window to volatility, alongside threats posed by China’s Evergrande complications, the tone changed markedly, given a fraying in the buy-the-dip psychology.

While strategists at JPMorgan Chase & Co (NYSE: JPM) suggest the selling was knee-jerk and technical, the truth is that, according to Reuters, “global stock funds lost the most since March 2020 as investors moved in [favor] of cash where they [plowed] in $39.6 billion of funds.”

Still, in the face of comments by the Fed, as well as the Evergrande and debt ceiling debacle, the liquidation resolved some fragility with respect to positioning and stocks rallied, affirming the beliefs held by Goldman Sachs Group Inc’s (NYSE: GS) Peter Oppenheimer and HSBC Holdings Plc (NYSE: HSBC) strategists that dip-buying is a go as “we’re still in the relatively early stages of this economic cycle.” 

To put it differently, per one Bloomberg article, “the lasting impression … is that for markets the tapir no longer has the power to induce fear in the way that it did eight years ago, … [and] [t]he post-Evergrande bounce has some life in it. It’s no dead cat.” A 4,700 or 5,000 S&P 500, as some strategists see it, could be in the cards.

Moreover, for next week, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,455.00 minimal excess high puts in play the $4,481.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,510.00 LVNode and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,455.00 minimal excess high puts in play the $4,415.75 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,393.75 HVNode and $4,365.25 LVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 9:00 AM ET Sunday.

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.

Options Expiration (OPEX): Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

More On 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.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. 

To note, inflation and rates move inversely to each other. 

Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates solicit hawkish commentary as policymakers look to inhibit inflation.

Weekly Trade Idea

News And Analysis

Weakening U.S. economy threatens swelling corporate debt mountain.

Ongoing debt limit fight is as much about 2022 politics as fiscal policy.

Alhambra Investments: Next steps to watch for a scarcity of collateral. 

From New York To Sydney: See the supply shocks spanning the globe.

Economic Outlooks U.S. Q4 2021: The rocket is beginning to level off.

Nancy Pelosi: The infrastructure plan will likely pass House this week. 

Treasuries at risk as Federal Reserve paves way for breakout in yields.

The SEC’s Gary Gensler doesn’t see cryptocurrencies lasting that long.

Bear market is unlikely, but stumble in stocks may lead to a bigger fall.

What People Are Saying

Let’s Hang Out

Salt Lake City, UT September 28-30

Las Vegas, NV October 1-3

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For September 19, 2021

Editor’s Note: Late today. So sorry! The main takeaway is that we’re in a window of volatility and participants should focus on leveraging rich skew and complex spreads to hedge or speculate on sideways to lower trade.

Market Commentary

  • SPX below balance, 50-day SMA.
  • Ahead is a 2-day FOMC meeting.
  • Concerns around the debt ceiling.
  • Rich skew makes hedging easier.
  • Post OPEX volatility likely in play.

What Happened: U.S. stock index futures auctioned lower, last week, into Friday’s quadruple witching derivatives expiry. 

Of interest this week is a meeting of the Federal Open Market Committee (FOMC).

Graphic updated 5:30 PM ET Sunday. 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. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: During the prior week’s trade, on weak breadth, the worst-case outcome occurred, evidenced by a balance-area breakout and separation of value below the S&P 500’s 50-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) has occurred.

We now monitor for rejection (i.e., return inside of balance) which portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of a waning economic recovery, heightened valuations in the face of strong EPS expectations, the prospects of stimulus reduction, non-seasonally aligned flows, impactful options and equity market dynamics, divergent sentiment, as well as fears of a mid-cycle transition.

In a Goldman Sachs Group Inc (NYSE: GS) note posted by The Market Ear, analysts “believe it is a critical period for many investors and companies that manage performance to calendar year-end. Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and managements’ guidance for the following year.”

At the same time, inflows into equities are exploding to the upside as JPMorgan Chase & Co (NYSE: JPM) technicians “do not see a pattern on the [S&P 500] chart or any cross-market dynamics that would suggest the market is set for a lasting bearish reversal. The late-Aug systematic sell signals lose statistical significance into next week and the seasonal trends improve into early-Oct.”

Graphic: Bank of America Corporation (NYSE: BAC) charts equity flows, via The Market Ear.

That said, we hone in on risks.

If concerns like the debt ceiling are not resolved, some economists argue, according to Bloomberg, “that an announcement on tapering is likely to be delayed to December, and that Treasury yields could fall further as a result.”

We note that – as Goldman Sachs writes – “The upcoming debt limit deadline is beginning to look as risky as the 2011 debt limit showdown that led to Standard & Poor’s downgrade of the US sovereign rating and eventually to budget sequestration, or the 2013 deadline that overlapped with a government shutdown.”

On the other hand, according to SqueezeMetrics, “the current combination of weak put flows and large customer vanna exposure” is fragile; “people are [still] overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Following SqueezeMetrics’ remarks, SpotGamma adds that “over 50% of stocks [had] their largest gamma position” roll-off Friday. This suggests an increased potential for volatility heading into the September 21-22 FOMC event.

In this post-quad-witching window of non-strength, we may, as a result, use the rich skew to hedge (see below Weekly Trade Idea section).

Moreover, for today, given an increased potential for heightened volatility and initiative trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,437.75 micro-composite point of control (MCPOC) puts in play the $4,481.75 high volume area (HVNode). Initiative trade beyond the $4,481.75 HVNode could reach as high as the $4,510.00 low volume area (LVNode) and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,393.75 HVNode. Initiative trade beyond the $4,393.75 HVNode could reach as low as the $4,365.25 LVNode and $4,341.00 untested point of control (VPOC), or lower.

We note that the $4,481.75 and $4,393.75 HVNodes intersect key anchored volume-weighted average price levels. These are metrics 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.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures updated 5:30 PM ET Sunday.

Key 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.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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 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 direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 29 SEP 21 4400/4300 PUT @.65 CREDIT LMT

I’m neutral to bearish on the S&P 500 and I think the index may slide toward $4,300. I will structure a spread below the current index price, expiring in about 2 weeks. I will buy the 4400 put option once (+1) and sell the 4300 put option twice (-2) for a $0.65 credit. Should the index not move to my target, I keep the $65 credit. Should it move to $4,300, I could make $10,065.00 at expiry. Should the index move past $4,200.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower. 

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

An essay on why you keep losing money as a trader.

August retail sales reflect strong consumer demand.

UBS: Resist temptation to time market despite highs.

U.S. debt ceiling fight could cause markets to tumble.

Nasdaq on whether Rule 605 works better in dollars.

Rally driven less by reflation prospects; TINA to stock.

Higher U.S. CGT proposal spurs a PE and M&A rush.

If a CEO talks like Kant, think twice before investing.

New vehicle prices surge amid global chip shortages.

Active managers’ performance disappointing in 2021.

DeFi is disrupting but not derailing traditional finance.

OpenSea admitted recent incident as insider trading.

SEC looks to greater oversight of the crypto markets.

Central bank digital currency; cash for the digital age.

White House to put forward three CFTC nominations.

Some key lessons from NYC’s first SALT conference. 

Let’s Hang Out

Salt Lake City, UT September 28-30

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For September 12, 2021

Editor’s Note: Keeping it light today; the main takeaway is that we’re in a window of volatility and participants should maintain a cautiously bullish stance, for the time being. Skew makes it so we can hedge for little-to-no cost using complex spreads (more on this below).

Please note that levels in the below graphics should only be relied upon as rough areas of resistance and support due to the December contract roll. Updated levels to come later this week, after daily commentaries resume Thursday, September 16.

Thank you and take care!

Market Commentary

Equity index futures trade lower, last week, resolving a multi-week consolidation area.

  • Narratives around slower recovery rising.
  • Equity indices falling; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures resolved lower, last week, alongside the evolution of some important dynamics with respect to the pace of the pandemic recovery and trend growth, non-seasonally aligned flows and positioning risks, as well as divergent sentiment. 

Of interest this week is data on the consumer price index, industrial production, retail sales, and some Fed manufacturing surveys. 

Graphic updated 12:00 PM ET Saturday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: During the prior week’s regular trade, on weak intraday breadth and mostly divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade below a key micro-composite high volume area (HVNode). 

This activity resolved a multi-week consolidation area (ie., balance). 

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

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

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

To note, initially, participants had a tough time separating value and expanding range lower. 

This was evidenced by the minimal excess at Wednesday’s regular trade low (RTH Low), coupled with Thursday’s overnight response at the 20-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests). 

Graphic: S&P 500 loses the 20-day simple moving average. A loss of that level officially changes the tone; “We maintain a cautiously bullish stance.”

Given that action – the difficulty participants had in moving prices out and away from balance – the path of least resistance was not down; stronger sellers were not yet on board, I explained

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.
Graphic: 30-minute profile chart of the Micro E-mini S&P 500 Futures and market liquidity, via Bookmap, for the SPDR S&P 500 ETF Trust (NYSE: SPY) coming into Thursday’s regular trade. Notice the cumulative volume delta (CVD) or buying and selling power as calculated by the difference in volume traded at the bid and offer. So, coming into Friday’s trade, stronger sellers were likely not yet on board.

The tone changed Friday when selling intensified; the 20-day simple moving average was lost and the S&P 500 closed the session on a spike lower, away from value.

Spike Rules In Play: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike). 

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, heightened valuations, the prospects of stimulus reduction, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, Morgan Stanley (NYSE: MS), Citigroup Inc (NYSE: C), and Goldman Sachs Group Inc (NYSE: GS) cautioned investors about equity outlooks. Of concern, in particular, is a rise in cases of the delta variant, tensions between inflation expectations and yields, as well as seasonality. 

Among other risks, as SpotGamma notes, “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility.” Read more on SpotGamma’s perspectives, here

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

SqueezeMetrics – which saw “the current combination of weak put flows and large customer vanna exposure” as fragile – echoes the risks of volatility adding “people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Moreover, for early trade next week, given an increased potential for heightened volatility and Friday’s end-of-day spike from value, participants may make use of the following framework.

If participants manage to find acceptance (i.e., spend multiple hours of trade) above the $4,467.00 spike base, then the odds of downside follow-through are lower. We’d look to maintain a cautiously bullish stance.

On the other hand, should participants have trouble maintaining prices above the $4,467.00 spike base, then the focus ought to be on big-picture risk management levels like the August 19, 2021 swing low and 50-day simple moving average.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 12:00 PM ET Saturday. Note that the roll to the December contract occurred on September 9, 2021. Therefore, levels in the above graphic should only be relied upon as rough areas of resistance and support. Updated levels to come Thursday, September 16, 2021.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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 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 direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 17 SEP 21 4350/4250 PUT @3.80 LMT

I’m neutral-to-bearish on the S&P 500 and I think the index may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current index price, expiring in 1 week. I will buy the 4350 put option once (+1) and sell the 4250 put option twice (-2) for a $3.80 credit. Should the index not move to my target, I keep the $380 credit. Should it move to $4,250.00, past the 50-day simple moving average, I could make $10,380.00 at expiry. Should the index move past $4,150.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2775/2700 PUT @.90 LMT

I’m neutral-to-bearish on Alphabet Inc and I think the stock may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current stock price, expiring in 1 week. I will buy the 2775 put option once (+1) and sell the 2700 put option twice (-2) for a $0.90 credit. Should the stock not move to my target, I keep the $90 credit. Should it move to $2,700.00, toward the 50-day simple moving average, I could make $7,500.00 at expiry. Should the stock move past $2,625.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

If necessary, I will hedge the position by either (A) selling stock, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Lenders continue to expect falling profits, refinancing demand.

Manchin seeing delay in Congress for vote on Biden’s agenda.

Massive decline in forbearances, down nearly 67% from peak. 

Oil prices continuing to fall as pandemic worries slow demand.

Moody’s: Democrats are at a fork in the road, may not take it.

COVID-19 and China risks won’t pass for years, some project.

Nasdaq talks market infrastructure, the real trends in volumes.

Bonds turning hot; European Central Bank redefines tapering.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

New York, NY September 12-15

Salt Lake City, UT September 28-30

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For September 4, 2021

Editor’s Note: Before getting into today’s commentary, we take a moment to reflect on the following quote taken from page 123 of The Disciplined Trader by Mark Douglas. 

“For years, many people in the academic community believed that the markets were random; this is a perfect example of their general lack of understanding of human nature. People act as a force on prices in perfectly logical ways, when you understand the logic of their fears.”

Also, given Labor Day, markets are closed Monday, September 6. As a result, Daily Briefs will resume Tuesday, September 7. Thank you and have a great extended weekend!

Market Commentary

Equity index futures traded sideways to higher last week.

  • Reality throwing a wrench in seasonality.
  • Ahead: Light calendar to base decisions.
  • Equity indices rising; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures auctioned mostly sideways to higher, into Friday’s nonfarm payrolls miss.

Next week participants have a light calendar to base decisions around.

Graphic updated 10:30 AM ET 9/4/2021. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: During the prior week’s trade, on mostly lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. 

This is significant because the sideways to higher trade marks acceptance, or a willingness to transact at higher prices after a v-pattern recovery, above the key 50-day simple moving average.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: S&P 500 maintaining prices above the 50-day simple moving average. This moving average can be looked at as a key dynamic level on any move lower. Losing that particular level likely changes the tone.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, August, over the past 25 years, has historically been the largest month for equity outflows. According to Goldman Sachs Group Inc’s (NYSE: GS) Scott Rubner, “We have seen none of these outflows and it has been buying the dip (TINA).” 

Given this divergence from the norm, advances are not “welcomed and may lead to a quick right tail hedging … [as] option volume notional is 120% of stock volume notional.” 

To put it simply, an increased share of options being traded expires within two weeks. The hedging of these directionally sensitive options can represent an increased share of volume in underlying stocks. 

As a result, option flows impact the underlying’s price, markedly. 

We couple this so-called right-tail hedging with the structural positioning – the so-called wall of worry – that can drive the market through three factors – change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta.

“Charm is a major driver for support in the markets,” said Cem Karsan of Kai Volatility Advisors. “All of that support is leading up to and accelerating into that Monday-Wednesday window” ahead of options expiration (OPEX). “And then the window really opens for lack of support. It’s not like there’s a bunch of selling all of a sudden. It’s a window of non-strength; a lack of these supportive flows that have been there prior.”

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish.”

With the August monthly OPEX behind us, the focus shifts now to September. At and around the same time, Morgan Stanley’s (NYSE: MS) Michael Wilson expects a formal signal (which would align with Karsan’s window of non-strength) on the taper of asset purchases, that could lead to a mid-cycle transition and possibly an S&P 500 correction.

“Assuming a stable equity risk premium at 345bp, P/Es would fall to 19x, or 10% lower.”

Graphic: @pat_hennessy breaks down S&P 500 OPEX returns. Pat sees that “OPEX week returns peaked in 2016 and have trended lower since.”

Adding, the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – may exacerbate any sort of risk-off scenario in which participants try to get ahead of whatever cascading reaction may come with a taper.

As Karsan explains: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

SpotGamma – in a September 2, 2021 note – echoed the possibility of volatility; “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility – however, traders may hold the pause button on selling that volatility due to the FOMC. This could catch less sophisticated vol sellers off guard and lead to some exacerbated volatility.”

Others, like SqueezeMetrics – which sees “the current combination of weak put flows and large customer vanna exposure” as fragile – suggest that volatility risks have risen, too.

Given the big picture context (i.e., status quo – higher prices – in the face of volatility risks) participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,527.75 high volume area (HVNode) pivot puts in play the $4,550.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the Fibonacci extensions at $4,556.25 and $4,592.25.

In the worst case, the S&P 500 trades lower; activity below the $4,527.75 HVNode puts in play the $4,510.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as low as the $4,495.00 and $4,481.75 HVNodes.

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 10:30 AM ET 9/4/2021.

Weekly Trade Ideas

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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 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 direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2770/2670 PUT @.15 LMT

I’m neutral on Alphabet Inc and I think the stock may travel sideways to lower over the next couple of weeks, toward $2,770.00, or the volume-weighted average price anchored from the July 28 gap. I will structure a spread below the current stock price, expiring in 2 weeks. I will buy the 2770 put option once (+1) and sell the 2670 put option twice (-2) for a $0.15 credit. Should the stock not move to my target, I keep the $15 credit. Should it move to $2,670.00 I could make $10,015.00 at expiry. Should the stock move past $2,570.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

If necessary, I will hedge the position by either (A) selling stock, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 10 SEP 21 4480/4430 PUT @.25 LMT

I’m neutral on the S&P 500 and I think the index may travel sideways to lower over the next week, toward its key moving averages. I will structure a spread below the current index price, expiring in 2 weeks. I will buy the 4480 put option once (+1) and sell the 4430 put option twice (-2) for a $0.25 credit. Should the index not move to my target, I keep the $25 credit. Should it move to $4,430.00, past the 20-day simple moving average, I could make $5,025.00 at expiry. Should the index move past $4,380.00 or so, beyond the 50-day simple moving average, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation. 

Reinventing tail risk: a fresh look at market crash protection.

Kansas City Southern mulls $27B CP Rail bid after ruling.

ARK Invest on commodities, innovation, economic signals.

Taliban relies on financing from China following withdrawal.

Hedge Funds cut exposure to stocks that count on China.

Three hours a week: China has put limits on video gaming.

Global gas prices threatening to dent economic recovery.

Are Treasuries in a cautious stance as debt story unfolds?

Could the macro theme/picture be an edge for day traders?

George Soros: Investors in China face a rude awakening.

400,000 homeowners enter the final month in forbearance.

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For August 29, 2021

Editor’s Note: If this commentary was valuable to you, consider forwarding it to your peers. Alternatively, share on social media and tag either @renatolcapelj or @physikinvest.

Wishing you good health and success!

Market Commentary

Equity index, bond, and commodity futures traded higher Friday. The VIX, US10Y, and dollar were sideways to lower.

  • What happened and things to expect.
  • Ahead is important employment data.
  • Trade Idea: Complex spread in GME.
  • Expecting less volatility to the upside.

What Happened: U.S. stock index futures auctioned sideways to higher last week alongside impactful events like the Federal Reserve’s Jackson Hole Economic Symposium. 

Ahead this coming week is important data on employment, consumer confidence, vehicle sales, manufacturing, and more. See here for updated calendar data.

Graphic updated 7:30 AM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. 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.

What To Expect: During the prior week’s trade, on mostly strong intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. This is significant because it suggests continued bullishness after a v-pattern recovery.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: Ally Financial Inc-owned (NYSE: ALLY) Ally Invest chart shows S&P 500 defending advance.

Further, the aforementioned trade is happening in the context of the Jackson Hole Economic Symposium. This event’s implications on price are supportive

To elaborate, given a slow down in the pace of the post-pandemic recovery, the Federal Reserve (i.e., Fed) decided not to manipulate policy to offset temporary factors. The reason being, policy effects are often delayed; doing something now could curb the recovery. 

Graphic: Guggenheim Investments unpacks the impact of weaker data on monetary policy.

At the same time, with measures like the Marshallian K – the difference between year-over-year growth in M2 money supply and GDP – turning negative, there are concerns around liquidity and its impact on the equity market.

Graphic: According to Bloomberg, “While stocks kept rising during frequent negative Marshallian K readings in the 1990s, the pattern since the 2008 global financial crisis — a period when the central bank was in what Ramsey calls a “perpetual crisis mode” — begs for caution.”

According to Moody’s, however, “it will take a while before liquidity concerns are justified even with the Fed likely to begin tapering its $120 billion in monthly asset purchases either late this year or early next.”

Why? Well, for starters, if liquidity was an issue, financial institutions wouldn’t be parking that much money at the Fed. Low volatility in the bond and stock market also implies ample liquidity, Moody’s adds.

So, by not rapidly reducing its asset purchases, the Fed isn’t worried about the economy overheating due to non-temporary inflation; instead, Chairman Jerome Powell maintains that “[o]verall global deflationary trends remain in force.”

Eventually, though, after progress is made on full employment, the Fed will taper, likely keeping inflation expectations in line.

To note, last week’s straight-up trade came alongside the so-called sale of any volatility spike which can – through the process of hedging – support the market. Here’s just one example that received a lot of attention.

“In theory, if a stock was dropping and the retail masses all started to sell puts, they could push market makers to start buying large blocks of shares,” SpotGamma, an important voice in the space, says. “This could stabilize a dropping stock.”

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The counterparty long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, given a divergent volume delta and decline in metrics like DIX and GEX, the odds of significant upside volatility are lower. Still, participants may make use of the following objective frameworks for next week’s trade. Check for updated levels in Monday morning’s commentary.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the minimal excess all-time high and $4,511.50 Fibonacci extension. Initiative trade beyond the $4,511.50 level could reach as high as the $4,520.25 and $4,556.25 extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,495.00 HVNode puts in play the $4,481.75 HVNode. Initiative trade beyond the $4,481.75 HVNode could reach as low as the $4,454.25 low volume area (LVNode) and $4,427.00 untested point of control (VPOC).

To note, the $4,454.25 LVNode corresponds with an anchored volume-weighted average price (VWAP), 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.

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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.

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

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:30 AM ET Sunday.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It is a peek into the thought process here at Physik Invest.

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 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 direction (delta), time (theta), and volatility (vega). 

Negative (positive) delta = synthetic short (long). 

Negative (positive) theta = time decay hurts (helps).

Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO GME 100 17 SEP 21 530/680 CALL @1.20 LMT

Though I began filling this trade at limits for credit as high as 2.00, the spread collapsed markedly, Friday. Still, there’s an opportunity for unique structures such as the 530C+1, 680C-2 that pay you to be long the stock.

All else equal (i.e., discounting factors such as an increase in volatility), should the spread trade fully in-the-money – meaning the stock travels to the $680 short strike – the 530 strike will be 150 points in-the-money while the at-the-money strikes, combined (based on current at-the-money pricing), will trade around $53.00.

That suggests the spread should price for a credit north of $97.00 to close. Nice!

Thesis: I’m bullish on GameStop and I think the stock may climb over the next week few weeks. 

I will structure a spread above the current stock price, expiring in 18 days. I will buy the 530 call option once (+1) and sell the 680 call option twice (-2) for a $1.20 credit or better. Should the stock not move to my target, I keep the $120.00 credit. Should it move to $680, I could make $15,000.00 at expiry. Should the stock move past $830 break even or so, I may incur unlimited losses. My goal with this spread is to capture the initial credit and close for additional credit if the stock moves higher. 

If necessary, I will hedge the position by either (A) buying stock, (B) widening strikes, (C) buying a far out-of-the-money call option to cap upside in case of an unpredictable move higher, or (D) roll strikes up in price and out in time.

Below is a log chart of GameStop Corporation (NYSE: GME) and the ratio spread profit zone.

News And Analysis

Treasury bears redeemed as Citi, Michael Burry see higher yields.

Visa jumps into the NFT craze, buying a CryptoPunk for $150,000.

The top 7 reasons why COVID-19 could lead to inflationary regime.

Storm Ida roars toward Louisiana with winds of 150 miles per hour.

Chinese health officials reject U.S. allegations on COVID-19 probe.

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About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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
Results

Case Study: Trading Skew With Ratio Spreads

What Happened: On June 23, 2021, shares of Tesla Inc (NASDAQ: TSLA) surged on news the company opened a Chinese-based solar-powered charging station with on-site power storage.

Prior to the development, the stock endured months of corrective activity during which negative narratives were out in full force. From calls against Tesla’s biggest bull – ARK Invest – to famed Michael Burry’s synthetic short position on the stock, it seemed as though the end was near.

However, as evidenced by Tesla’s June 23 breakout from consolidation and subsequent upside continuation in light of a 300,000 vehicle recall in China, it is obvious the fear was unwarranted.

Those who understand that markets are most influenced by credit and positioning knew this all along.

Taking a look at market liquidity metrics – such as those offered by services like HFT Alert – market participants had been aggressively accumulating shares of the company from its mid-May low.

Graphic 1: Buying accelerates (as evidenced by the purple line), in Tesla, after its mid-May bottom, via HFT Alert

Still, with skepticism out in full force, there was a heightened demand for protection, as evidenced by metrics like volatility skew, in options at and below the current stock price.

Skew: The difference in implied volatility (IV) – an estimate of potential price changes given the fear of movement – between option strikes that are close and far from the underlying stock price. 

To put it simply, the fear of corrective activity in Tesla fueled demand for protection via put option strikes farther below the stock. This, in turn, bid volatility in downside strikes, more than upside strikes. Because volatility is input in option pricing models, put options, further down the chain, were valued more relative to their call-side counterparts.

Graphic 2: June 23, 2021 screenshot implies increased demand for put options, further below (left of) the stock price, relative to calls (right) for the expiries traded. 
Graphic 3: Notice the increased volume and open interest in put option strike prices at and below $500. This dynamic results in skew, as observed in Graphic 2. 

Given this dynamic, the following sequence analysis unpacks how Physik Invest traded options tied to the carmaker leading up to, and through, the June 23, 2021 upside consolidation break.

Note: Click here to view all transactions. Adding, positions were structured in a way that would potentially net higher credits had the stock moved markedly lower or higher.

Sequence 1: After skew was observed, through 6/18/2021, the following positions were initiated against the $500 support level for a $1,011.00 credit.

  • June 11 Expiry 500P+1, 450P-2
  • June 25 Expiry 490P+9, 440P-18 
  • June 25 Expiry 550P+2, 500P-4
  • June 25 Expiry 300P+2

By 6/21/2021, all aforementioned positions were closed for a $271.00 debit, netting a $691.58 credit after commissions and fees.

Sequence 2: Through 6/29/2021, skew improved and the following positions were initiated for a $5,651.38 credit.

  • July 2 Expiry 500P+3, 450P-6 
  • July 2 Expiry 525P+7, 475P-14
  • July 2 Expiry 545P+1, 495P-2 
  • July 9 Expiry 850C+2, 900C-4 
  • July 9 Expiry 580P+11, 530P-22 
  • July 9 Expiry 350P+3 
  • July 16 Expiry 850C+4, 900C-8

Through 7/12/2021, the above structures were removed for a $90.00 debit, netting a $5,443.93 credit after commissions and fees.

Sequence 3: Through 7/6/2021, skew remained and the following positions were initiated for a $3,566.00 credit.

  • July 16 Expiry 575P+11, 525P-22
  • July 16 Expiry 600P+1, 550P-2
  • July 16 Expiry 350P+3 

Through 7/14/2021, the above structures were removed for a $473.00 debit, netting a $3,043.29 credit after commissions and fees.

Summary: In total, the sequence of trades net a $9,178.80 credit after commissions and fees. 

The above strategies were employed per Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns. 

By leveraging the dynamics of time and volatility, through complex spreads, Physik Invest was paid to express a neutral stance on underlying Tesla stock with the potential to further capitalize on an expansion of range in either direction.

Disclaimer: There is a $0.77 discrepancy between the transaction sheet and the numbers provided in this case study. This is attributable to differences in rounding.

Categories
Commentary

Weekly Brief For August 1, 2021

Editor’s Note: On Thursday (8/5) and Friday (8/6) there will be no Daily Brief newsletter. Additionally, there will be no Weekly Brief Sunday (8/8), either. All commentaries to resume August 9, 2021.

If in the Miami, Florida area please contact renato@physikinvest.com if interested in connecting over markets, fintech, and the like.

PS: Added a new “Weekly Trade Ideas” section. Hope it provides added value!

Regards,

Renato Leonard Capelj

Market Commentary

Key Takeaways: Equity index futures to start the week off neutral, in prior-range and -value.

  • Debt limit, China, fiscal policy cloud outlook.
  • Expecting a heavy week for economic data.
  • Responsive trade until key levels are taken.
  • Amazon Inc (NASDAQ: AMZN) trade ideas.

What Happened: With respect to hot topic market risks, the week prior offered a ton of information to add to our narrative. We list for clarity.

  • Debt Limit: The August 1 reinstatement of the U.S. debt limit may have severe consequences, increasing the odds of a rating downgrade on government debt.
  • Monetary: Come September, participants will likely receive increased clarity over taper timelines with an official start early next year. Adding, Chairman Jerome Powell expressed inflation as temporary and the committee announced the creation of a pair of standing facilities to strengthen its ability to be the lender of last resort in the repo market.
  • China: Cross-asset volatility in China worsened, prompting talk of a yuan devaluation. A devaluation is something to fear; to note, The People’s Bank of China (PBOC) roiled global equity markets after its 2015 yuan devaluation.
  • Growth: U.S. economic data came in weaker suggesting growth likely peaked. Notwithstanding, consumer confidence improved markedly with sentiment recovering fully. Moody’s strategists look for real GDP to rise 6.7% this year, a downward revision on some fiscal policy assumptions.
  • Fiscal: Lawmakers debate another round of stimulus to ensure the strong long-term growth of lower- and middle-income households. The proposed legislation is receiving pushback with respect to its impact on inflation and taxes. Moody’s strategists note “higher taxes will weigh on economic growth, but the impact on the economy from the higher proposed taxes will be small.”
  • Pandemic: COVID-19 variants are a cause for concern – especially with respect to the Federal Reserve’s tapering of quantitative easing – but hospitalization ratios and mobility metrics suggest the crisis is likely over. In other areas, the CDC’s rental eviction moratorium and FHFA’s foreclosure moratorium expired with forbearance on government-backed mortgages and student loans ending September, also.
  • Yields: Technical factors – issuance, short coverings, a fading reflation trade, and peak growth – are to blame for lower Treasury yields. A longer-term deviation from the implied “economic fair value” of 1.6% and 1.65% for the 10-year yield would suggest other forces are driving long-term interest rates.
  • Earnings: Year-over-year profit growth of S&P 500 constituents stands at 85% with 88% of companies beating estimates for revenue and profit, according to Business Insider
  • Positioning: According to one Bank of America Corporation (NYSE: BAC) comment, highlighted by The Market Ear, “The average recovery time following 2-sigma one-day S&P declines has shortened significantly post-GFC, reaching an all-time low this year.” This has a lot to do with the inventory positioning of participants; volatility is oversupplied and associated heading forces make it so there is more liquidity and less movement. Should the market unpin, there’s “not enough liquidity” to absorb leverage on the tails.

Putting it all together, Goldman Sachs Group Inc (NYSE: GS) believes “[e]xpectations of higher interest rates and higher corporate tax rates by year-end are the primary reasons [to] forecast that the S&P 500 will trade sideways,” into end-of-year.

In support of that view is seasonality, also.

Graphic: Seasonality metrics via the Capital Market Outlook by Merrill.

What To Expect: The S&P 500, Nasdaq 100, and Dow Jones Industrial Average are above their key 20-, 50-, and 200-week moving averages while the Russell 2000 is stuck inside a multi-month trading range, between its 20- and 50-week moving averages.

Given the higher long-term trend, traders of the S&P 500, in particular, must contend with a week-long balance area, the result of participants finding higher prices valuable as they position themselves for a directional move, given increased clarity on earnings, taper, and more. 

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

In the coming sessions, given that the modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break), participants will want to focus their attention on where the S&P 500 trades in relation to the $4,392.25 high volume area (HVNode) pivot.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,392.25 HVNode pivot puts in play the $4,406.25 low volume area (LVNode) and $4,419.00 untested point of control (VPOC). Initiative trade beyond the VPOC portends a potential breakout above the $4,422.75 minimal excess high, up to the $4,428.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,392.25 HVNode pivot puts in play the $4,381.75 LVNode. Initiative trade beyond the LVNode portends a potential breakdown below the $4,370.50 minimal excess low, down to the $4,353.00 VPOC and $4,341.75 micro-composite point of control (MCPOC).

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

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

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the blue anchored Volume Weighted Average Price (VWAP) which suggests the average buyer, since FOMC, is underwater. To note, VWAP is 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.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It is a peek into the thought process here at Physik Invest. To cover my butt, so to speak, I say DO NOT take this trade. Also, if you would like to see this section included in future commentaries, email me at renato@physikinvest.com with the subject line “Please Include Weekly Trade Ideas”.

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 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 direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO AMZN 100 (Weeklys) 6 AUG 21 3600/3700 CALL @.50 LMT

I’m bullish on Amazon and I think the stock may climb over the next week, toward $3,600. I will structure a spread above the current stock price, expiring in 1 week. I will buy the 3600 call option once (+1) and sell the 3700 call option twice (-2) for a $0.50 credit. Should the stock not move to my target, I keep the $50 credit. Should it move to $3,700, I could make $10,050.00 at expiry. Should the stock move past $3,850.00, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves higher. 

If necessary, I will hedge the position by either (A) buying long stock, (B) widening strikes, (C) buying a far out-of-the-money call option to cap upside in case of an unpredictable move higher, or (D) roll strikes up in price and out in time.

What People Are Saying

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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
Results

Case Study: Trading A Balance-Breakout Failure In The Nasdaq 100

What Happened: On April 29, 2021, market participants attempted to move the Nasdaq 100 stock index from balance, an area of recent price acceptance, above a developing ledge, or flattened area on the composite volume profile.

Further, participants failed to find acceptance beyond the balance area, given the Nasdaq 100’s move back into the prior range. As a result, odds favored (1) sideways or (2) lower trade, as low as the balance area low (BAL) near $13,700.00.

Adding, a weak reaction by heavily-weighted index constituents to blowout earnings, as well as poor structure left behind prior price discovery, among other factors, such as the will to raise the Capital Gains Tax, suggested an increased potential to trade below the $13,700.00 BAL, into prior poor structures, or low volume areas (LVNodes), that ought to offer little-to-no support.

In response, the following sequence analysis unpacks how Physik Invest traded options tied to both the cash-settled Nasdaq 100 (INDEX: NDX) and Nasdaq 100 (CME: /NQ) future, leading up to the May 12, 2021 swing low. 

Note: Click here to view all transactions.

Sequence 1: On April 29, 2021, Physik Invest applied the balance-break and gap scenarios, monitoring for acceptance (i.e., more than 1-hour of trade) outside the balance area. 

To preface, gaps ought to fill quickly. 

Should they not, that’s a signal of weakness; leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. 

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction.

After a confirmed balance-breakout failure, Physik Invest bought the following structures for a $203.00 debit. At this point, if all legs were to remain out of the money (i.e., expire worthless) by May 21, 2021, the maximum loss would have been $203.00, approximately 1/5 of a standard risk unit, or the debit risked in a typical position.

  • 13500+1/13300-2/13100+1 NDX long put ratio spread
  • 14100+3/14110-6/14140+3 NDX short call ratio spread
  • 14400-1 /NQ short call

By 5/10/2021, the aforementioned position was closed for a $1,855.00 credit, an 813.80% return on the initial debit outlay.

The above put-side structure was initiated against the $13,300 high volume area, also a prior balance area boundary. The reason being, a structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

Summary: After a failed balance-breakout setup presented itself, Physik Invest financed long put-side structures targeting a test of $13,300, with short-call exposure, risking ⅕ of a standard risk unit in debit, over a timeframe of one month.

In total, the sequence of trades net a $1,621.71 profit after commissions and fees.

The above strategies were employed in accordance with Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns.

Yes, in hindsight, one could have opted for static short exposure (e.g., selling stock to open a position). However, the risks tied to such strategies are immense in a regime characterized by increased volatility and uncertainty.

By leveraging the dynamics of time and volatility, through complex spreads, unwanted directional risks were reduced.

Reflection: Hindsight is 20/20.

Though the entry was perfectly timed, the exit was not; 1-day prior to expiry, the 13500/13300/13100 ratio spread – which was removed for a $21.11 credit – priced at nearly $90.00. 

The correct move would have been to initiate the position with up to four 13500/13300/13100 ratio spreads. Thereafter, as prices moved lower, the position would have been pared down enough to at least cover the cost of any remaining spreads.

Those remaining spreads would have been kept on as so-called “lottery tickets.”

Categories
Methodology

Presentation: Trading Options Strategically

From Theory To Practice

How to express your opinion strategically using options.