FOMO

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:

"Never get caught without a position"

This is an old trading adage for professional traders! Almost everyone else in the market should not live by this quote.

The reason why a pro always wants a position, and to never "be caught without one", is because they manage risk better than everyone else. A position is the lifeblood of trading. If you can generate positive p&l while mitigating risk, you win.

Pros are highly capitalized, have access to fantastic information (not just twitter, oh by the way follow us!), and understand every "exit door" to their risk.

Money on the sidelines is better than losses, because the first rule of compounding is "you can't compound money you don't have!"

What happens to the FOMO crowd, is they end up chasing that cat's tail up and down the stairs just to end up nowhere and pissed off!

There is so much opportunity in the market, that you shouldn't fear missing out, you should fear not know how to GET OUT!

That's the difference between an amateur and a pro in a nutshell.

BANG for Your Buck:

Now that the market definitively broke through 4100, it maintains a bullish lean. The 4200 strike has large open interest, and will act as resistance due to positive dealer gamma.

Pushes above will tend to be sold by dealers to stay market neutral.

In FOMO land, people traded nearly 2 million calls today, and about 1.5 million puts. My guess is a bunch of people "missed the rally," and are fearing missing out of further upside. They are using shorter dated calls to capture whatever is left of this move.

You can see this in the SPX and VIX relationship. SPX +1.47% and VIX +4.81%. Remember, VIX correlates to near-the-money option premiums. So even as the market rallied, the cost of buying options increased.

But you know what usually happens when everyone is one way...it tends not to "pan out."

The reason for this is 3-fold:

• The most fervent buyers already bought and may look for an easy short-term profitable exit (they can also start selling SPX calls against their underlying longs as an exit, if they were smart!) Not saying that the market has "run out of interested buyers", but the pool does dwindle.

• More hands = more weak hands. Weak hands tend to act as a monolith and create short term momentum. Pro multi-hundred-billion-dollar momentum chasing funds pile on and bend the weak hands to their will.

• Short-term option volume as we've seen in the past 2 weeks, loses its "market moving mojo" quickly. If those positions aren't re-instantiated, it cuts off the oxygen to the fire.

The BANG tells you what the option bookmakers are pricing potential underlying movement. 

End of the Week Events

• Feb 1 - FOMC rate decision and press conference

  • Our boy J-Pow set the tone for the year: giddiness!

  • Not saying optimism is a bad thing, but c'mon man, your "illusion" of a soft-landing is quite persistent at the very least

  • Honestly, I have no idea what a soft-landing means for asset prices, but either way we'll be there to trade it!

  • Fed fund target rate increased by 25bps as anticipated.

• Feb 2 - Jobless Claims / Earnings (including AAPL which is ~7% of the SPX)

  • Apple had less than stellar news on earnings

• Feb 3 - Non-farm Payrolls

  • This has potential to "shake" the rally a bit

  • Oh, and the ADP economists are already saying "bad weather" in Jan is why the numbers may not be great...yes folks, weather!

Large Option Positioning

• 4200 strike creates large positive gamma for dealers and will act as resistance.

• Staying above the 4100 strike perpetuates the bullish lean

• 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.

As always, pursue the process NOT the profits! See you tomorrow!