- The Jumping Cholla
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- Accepting Losses
Good Morning!
This is the Jumping Cholla (CHOY-uh). The newsletter that turns options market insights into a fun, easy-to-read email that helps you reduce your chances of getting pricked while trading!
And even if you don't trade, learning how to think like a trader builds a robust framework for problem solving, taking risks, managing a plan, and just living life.
Quote of the day:
"Accepting losses is the most important single investment device to ensure the safety of capital"
-Gerald Loeb
Nature teaches this exact lesson. Look at the Jumping Cholla cactus, it evolved a mechanism to protect your core and prosper!
Remember, you can't compound capital that you don't have...and the power of compounding is what generates substantial gains.
BANG for Your Buck:
| 2/7/2023 SPX = 4111.08 | Handles of Movement | Implied % Move |
|---|---|---|
| BANG (intraday) | 50 | 1.2% |
| BANG (weekly) | 111 | 2.7% |
Here at the Jumping Cholla, the BANG is our translation of option volatility into potential underlying movement. In gambling terms, this is where option bookmakers "set the line."
This expectation of movement (i.e. volatility) changes in real-time as underlying moves, option prices change, supply/demand of options change, etc. Take a peek at our write-up on the dealer feedback loop for more info.
Large Option Positioning
4200 strike creates large positive gamma for dealers and will act as resistance above and a magnet below.
Staying above the 4100 strike perpetuates the bullish lean.
A breach of 4100 will likely test the option support at the 4000 level.
3900 strike creates large negative gamma for dealers, which will exacerbate movement near there. In general, a break under 4000 gets the dealers to start hedging with the direction of the market and a pop in volatility.
Overall, "downside protection" i.e. puts, are priced historically cheap. But remember, there's a sh*tload of liquidity in ultra-short dated options, and as long as the marketplace can take these bets, what's the real need for longer dated hedges? Why not just wait until you need to buy the insurance?! (FYI, this works until it doesn't!!!)
VIX Trades: large trades occurred that essentially bet that volatility will go up precipitously into March. FYI, with the current stance of option open interest, volatility can't really increase massively until the SPX is under the 4000 level.
News/Reports
Jerome Powell will give a nice little speech today, probably to pat himself on the back as well as to remind everyone that "he still has work to do"...whatever that means. Regardless, it could provide opportunity to trade.