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Good Morning!
This is the Jumping Cholla. The newsletter that turns options market insights into a fun, easy-to-read email that helps you reduce your chances of getting pricked!
Let’s set the tone with the quote of the day:
"He who walks through turnstile at airport sideways is going to Bangkok"
-Confucius
Oh, you think you’re clever? There are more “super smart” people that get burned by the market than not. If it looks like a turnstile, just walk straight through it! Read the market signals, understand the core reasons why the market is behaving as it is, and just go with the flow!
BANG for Your Buck:
SPX ref = 3829.25
BANG (daily) = 52 handles of movement ~1.3%
BANG (weekly) = 115 handles of movement ~3.0%
Whether you're long or short options, you better know how much underlying movement is required to justify that option price!
Why is this so important?
The BANG tells you what the option bookmakers are pricing potential underlying movement. As you’ll see in the learnding moment below, we can determine where fear and uncertainty are building, or not. Wouldn’t it be nice to know that your brilliant trade idea has some basis in reality?
As the BANG expands (expected volatility in the market), bookmakers are pricing in larger potential underlying movements. As BANG contracts, the expected range of possibilities contract as well. Not to say it’s perfect, because exogenous shocks are what cause the most pain and profit potential… but if you’re doing this everyday, you will see the BANG get satisfied 68% of the time.
Today's Learnding Moment
Date:12/28/22 (yesterday) | SPX open ref = 3829 | BANG = 52
This is another one of those days where the BANG gets fulfilled early (the “sophisticated” folks like to refer to this as realized volatility greater than implied).
SPX opens and rallies 20 handles, then sharply turns back around for 40 more handles. This is all by 10:30a CT. Obviously, great selling opportunity up there, and even if you were late to the party but verified the momentum (like a good boy), there’s at least 20 handles in it for ya!
So you’re short around 3825…
What is there to do? Let her ride, or take your money and run. Let’s think about the BANG…20 up + 40 handles down = 60 / 52 >100%.
So the 3805ish level could be a natural stopping point. Not a bad spot to take some profits, or screw it, take it all off and call it a day!
But to get a continuation, we NEED to see volatility increasing! The option market needs to re-price its expectation of underlying movement!
Let’s take a look at a BANG surrogate, the VIX…
Well what do we have here...VIX did not increase above its opening level (the start of day expectation) until AFTER the BANG was satisfied. In those next 10 handles of sell off, some fear has entered the option market. This puppy may have some room to sell off as long as volatility keeps increasing!
Nooo, nooo it doesn’t… the fear is gone (for now!) as seen in the VIX collapse, and the chance of downside continuation should be reduced. But who cares, you went with the flow, you non-clever bastard, and you probably got out of your remaining shorts around 3805!