Buy the Rumor and also Buy the News!

Good Morning!

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Quote of the day:

"Buy the rumor, and also buy the news!"

Wait a minute, isn’t the age-old trading adage “buy the rumor, sell the news”?!

Yep, it sure is, but in these “unprecedented times” (lmao), I’m pretty sure you can make sh*t up on the fly. And that’s what the market does anyways. Generally, financial commentators are in search of a story based on the price action, not the other way around.

Hell, even if you expect price action to go a certain way based on newly reported data (yesterday’s CPI rings a bell), you are most certainly wrong!

You may ask yourself, how is that even possible? Well, because sometimes it’s just easier to make money “playing the person” not the probabilities. When people have predictions like “given x number, the market should do y”, it’s fairly easy to shake them out of their fresh bets. (lots of biases in play i.e. confirmation, anchoring, recency)

Take a look at the super smart bankers predictions (FYI, these never work)

January CPI Report

As we noted the other day, the next big catalyst was the CPI report. This is supposed to tell us if inflation is abating or getting worse.

Firstly, with a volatility drop expected (recall event volatility), dealers will need to “lighten up” their short hedges, thereby putting upward pressure on the market. The fancy finance bros like to call these Vanna flows. Vanna is a second derivative option Greek that measures the change in delta given the change in volatility. Non-dbags just call it DeltaVol (remember one of our first articles, DON’T BE CLEVER)

The number comes out pre-open, and it’s not good. They expected year-over-year inflation to be 6.2%, but actual was 6.4%. And inflation in January was 0.5%, so that sucks.

Let’s see how the futures market reacted.

Picture perfect. Bid it up into the report, and then sell it off. Love it!

But remember, this is all pre cash open. Let’s see how the cash market reacted.

Dafuq is going on here?! 40 handles up (even a 10% volatility drop doesn’t have that type of power), 50 handles down, then grind 40 handles up.

It flirted with the large option open interest at 4100 but did not get the follow through. If it did, I would’ve expected much more selling because dealers get shorter gamma and need to hedge with the direction of the market.

Does this make sense given the CPI number? Who cares!

Focus on capturing some of those luscious moves and leave the storytelling to the blowhards on TV.

As Paul Rizzo from the Jerky Boys so eloquently states “it’s hard times, these f*ckers, they gotta buy!”

See ya there later, nitz!

BANG for Your Buck:

Volatility came off after the CPI report was released. On the cash open, the 0DTE straddle was ~$35. That was cheap for the movement experienced yesterday. Lately, getting long “realized volatility” via 0DTE option gamma has been a winning trade.

Skew remains elevated due to persistent put buying. It seems that some participants are “buying their insurance” at these cheaper volatility levels.

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 is critical support and perpetuates the bullish lean.

• A breach of 4100 will likely test the option support at the 4050 and 4000 level. And recalling the Feb17 24k 4050 Put trade, as the market gets closer to the strike, dealers will need to hedge by selling futures, thereby adding to momentum.

• 3900 strike creates large negative gamma for dealers, which will exacerbate movement near there.

• "Downside protection" i.e. puts, are starting to come up in value a touch…they are ~12% more expensive than they were at the start of the year, but still 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! 1) It’s very costly to consistently protect against “overnight gaps” with short dated options 2) liquidity will dry up at the time when most needed)

• VIX Trades: last week, large trades occurred that essentially bet volatility will go up precipitously (50% to 100% higher from here) into March. Looks like some of that rolled to May at half the price and double the size. 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

• VIX expiration Feb 15th

• February OpEx (options expiration) on Feb 17th. Roughly 25% of all gamma expires.

Generally, VIX and option expirations clear the decks. The money tied up from prior bets are freed up, and ready to deploy within a couple days after expiration. This usually refreshes and/or changes the dealer hedging feedback loop.

As always, pursue the process NOT the profits!