Categories
Commentary

Daily Brief For January 3, 2022

What Happened

Overnight, equity index futures auctioned higher. Ahead is data on Markit Manufacturing PMI (9:45 AM ET) and Construction Spending (10:00 AM ET).

Graphic updated 6:20 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. 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

Technicals: Given the Monday gap, the S&P 500, based on its relation to Thursday’s failed balance breakout and end-of-week liquidation, is positioned for sideways-to-higher.

To note, however, the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Graphic: Weekly chart for the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Technically, indices are still positioned for sideways or higher.

Fundamental: The aforementioned trade is happening in the context of higher valuations, interest rates, and tax rates, according to Morgan Stanley (NYSE: MS).

These themes serve as a headwind.

To elaborate, as Nordea recently explained, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: The “annual rate of change in the Fed Funds rate” via topdowncharts.com.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

“Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak,” JPMorgan Chase & Co (NYSE: JPM) noted

“We believe this will produce a strong cyclical recovery, a return of global mobility, and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy.”

Positioning: According to JPMorgan Chase & Co, “S&P 500 skew overprices downside and underprices upside probabilities relative to historical returns.”

Graphic: Via The Market Ear, JPMorgan’s analysis suggests downside protection is overpriced.

This is all the while the S&P 500’s implied volatility remains above pre-COVID levels.

“SPX implied volatility is well above its pre-Covid level across the term structure.” The compression of volatility lowers the counterparties’ exposure to the positive delta. This “vanna” flow may support higher prices.

Taken together (in the face of last week’s options expiration which reduced the level of positive sticky options gamma concentrated mostly at the $4,800.00 level in the S&P 500), current options positioning and buying pressure supports a seasonally-aligned price rise in January.

Explanation: As a position’s delta rises with underlying price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta. Counterparties are to offset gamma by adding liquidity to the market (i.e., buy dips, sell rips).
Graphic: SpotGamma data suggests the pin heading into Friday’s options expiration is no more.

The continued compression of volatility will only serve to bolster any price rise as “hedging vanna and charm flows, and whatnot will push the markets higher.”

Should that thesis not pan out – meaning the removal of hedging pressures associated with “put-heavy” single stock options positions and an end to tax-loss harvesting, among other factors – indices likely succumb to the “stealth correction” of its lesser weighted constituents.

Were participants to reach for downside protection, the implications of this would be staggering. In such a case, markets will tend toward instability. At present, the metrics don’t point to this.

Graphic: Via The Market Ear, amidst heightened cash allocations that are likely to be redeployed, “January is the big inflow month but the seasonality from here is looking less exciting.”

Expectations: As of 6:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, 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.

In the best case, the S&P 500 trades higher; activity above the $4,791.00 untested point of control (VPOC) puts in play the $4,799.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,805.00 and $4,815.00 extensions, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,791.00 VPOC puts in play the $4,781.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,767.00 VPOC and $4,750.75 overnight low (ONL), 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.

What People Are Saying

Definitions

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 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.

Options Expiration (OPEX): Traditionally, 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) 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.

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 is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 

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
Methodology

Macro And Options And Excessive Leverage, Oh My!

Yesterday, Physik Invest’s Renato Leonard Capelj joined Benzinga’s Spencer Israel and Aaron Bry live.

Topics discussed include Capelj’s thoughts on the current market environment, as well as how he goes about structuring trades around his opinion.

Tune in, below!

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 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

Daily Brief For September 9, 2021

Editor’s Note: Daily market commentaries to pause until Thursday, September 16, 2021, due to travel commitments. A weekend commentary will be in your inbox earlier this week.

All the best, 

Renato

Market Commentary

Equity index futures trade lower with yields, dollar, and bitcoin. Most commodities were green.

  • Narratives around slower recovery rising.
  • Ahead is jobless claims data, Fed speak.
  • Positioning risks mounting case for lower.

What Happened: U.S. stock index futures auctioned lower overnight alongside narratives surrounding a slowed economic recovery and stimulus reductions. 

Ahead is data on jobless claims (8:30 AM ET), as well as Fed-speak by Bowman (1:00 PM ET) and Williams (2:00 PM ET).

Graphic updated 6:30 AM ET. 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: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on weak intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by sideways trade at the $4,510.00 pivot, the low end of a recent consolidation (i.e., balance) area. 

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

This is evidenced by the minimal excess at yesterday’s regular trade low (RTH Low), coupled with an 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). 

In other words, we’re carrying forward the difficulty participants had, in days prior, to moving prices out and away from balance. The path of least resistance – at least in prior trade – was not down; stronger sellers are not yet on board.

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. Perception of value has changed if value not overlapping (i.e., outside day). Delay action 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). Notice the volume delta (CVD) or buying and selling power as calculated by the difference in volume traded at the bid and offer.
Balance-Break Scenarios In Play: 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.

Though we expect sideways to lower trade – for the time being – we monitor for rejection (i.e., return inside of balance) which portends a move higher, to the opposite end of the balance.

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, 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 SqueezeMetrics summarizes, “[p]eople pretty much stopped buying S&P 500 puts [last] week. At the same time, 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 today, given an increased potential for moderate volatility and responsive trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH).

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 LVNode and $4,427.00 untested point of control (VPOC).

Note the developing volume-weighted average price (VWAP) pinch. 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. We look to buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.

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.

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 6:30 AM ET. 

News And Analysis

Traders rush to dump China tech stocks as gaming targeted again.

Decision Guide: The ECB counts risks in setting bond-buying pace.

Aluminum notches fresh 13-year high on supply woes and demand.

China’s zero-COVID approach will aggravate rising corporate risks.

Fauci: We don’t even have “modestly good control” over COVID-19.

Coinbase threat shows there’s a new cryptocurrency sheriff in town.

White House eyeing increased hacking around the coming holidays.

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 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.