The Noble Pursuit of Price Discovery

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:

"Find some @sshole and bury him!!"

Let this serve as a reminder, no one cares about you and your precious pnl…if any market participant has the chance to f*** you in their noble pursuit of “price discovery”, they will!!!

BANG for Your Buck:

• SPX ref = 3840

• BANG (daily) = 53 handles of movement ~1.3%

• BANG (weekly) = 116 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?

Because the guys on the other side of your trade aren’t degenerate gamblers like you, they’re actually trying to be “Vegas bookmakers.” Mispricing comes from over/under estimating potential market movement (which is what we like to call volatility).

For any time frame, understanding where the underlying market started, currently is, and where the betting markets “priced potential movement” (vol…yep, you’re gettin’ it) defines the likely path of least resistance for the underlying market.

We explained why this theory works in a past newsletter where we dove into how market makers/dealers think and why they are able to take so many bets without imploding.

Today's Learnding Moment

Date:12/27/22 (yesterday) | SPX open ref = 3844 | BANG = 50

Futures were up 20 handles in the overnight session, then we had some numbers came out in the morning, and futures sold off to unch’d.

SPX open continued the sell off for 30 more handles, then sharply turned around and went back to unchg’d again by 9:30 CT.

For those keeping tally at home, and even ignoring the overnight futures movement, the market realized >100% [(30 handles down + 30 handles up) / BANG] of its likely potential movement within an hour…

so what?

Well, after seeing that happen, you should be extremely cautious about picking a direction near the unch’d level. There isn’t a lot of “running room” left in the BANG. Unless you lower your expectations, it could be a recipe to get chopped up.

So for directional moves, you need to wait (yes, that’s hard for some of you) for some directional momentum to build. And even after you get a direction, that move will probably be short lived…

Or since the BANG has been satisfied, any option with premium left in it is a gift! Lol, definitely not, but I assign the edge to short premium opportunities, such as selling options and/or spreads as the market oscillates and essentially “betting” that the market’s range is already set i.e. the market won't make a lower low or higher high.

Or for my home run hitters out there who think we’re closing unch’d on the day, go buy a 5 handle wide fly centered at unch’d for ~ $50 with a payout of $450. (spoiler alert: it doesn’t hit)

As you see on the chart, the biggest move after the BANG was satisfied was 15 handles…I don’t know about you, but I can’t pick tops OR bottoms, so a realistic momentum capture would be roughly half at 7 handles.

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