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- President's Day
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:
"Hate it or love it, the underdog’s on top"
- Esteemed Vol trader, Curtis Jackson aka 50 cent
Our volatility playboi and famous rapper 50cent is back! He’s bidding up volatility like it’s going out of style. Definitely an underdog move, with massive asymmetric payouts…some may even say, the underdog may come out on top! Well, we’re not sure if it’s really you, Fifty, but I like to believe it in my heart!
One vol participant affectionately named 50cent, has bought 100s of thousands of VIX 50 Calls that cost roughly $0.50 each.
When you buy VIX calls, you are not only betting on the direction of volatility (up), but also that vol of vol (the volatility of volatility) is going up. You need a real “crash-like” move for this to work. This is why these bets are pretty cheap and offer massive profit potential. This dude’s been right before (to the tune of hundreds of millions in profit), but who knows if he is now. Remember paper is always right…for themselves!
I hope you all had an excellent President’s Day. And even though the cash markets were closed, the futures had enough movement to get the VIX to pop a few percent. (Gotta love traders!) So maybe Fiddy is onto something!
BANG for Your Buck:
| 2/21/2023 SPX = 4079.09 | Handles of Movement | Implied % Move |
|---|---|---|
| BANG (intraday) | 55 | 1.3% |
| BANG (weekly) | 120 | 2.9% |
On Friday, boat loads of shorter dated calls were bought...again. Market opened lower and was bid up all day. Remember what I said the other day, just do what works until it doesn’t. I have a feeling that one-week theme is over, but boy oh boy it worked like a charm. When the market gives you a gift, you take it!
Options Market Positioning
4200 = major resistance.
This area creates large positive gamma for dealers. They will sell rallies above and buy dips below to naturally dampen volatility near here.
4100 = pivotal.
With large option open interest, staying above it perpetuates the bullish lean. Since we are slightly below, the edge is to the downside.
4000 = critical support and entering large negative gamma land.
A break through 4000 forces dealers to hedge with the direction of the market, which naturally increases real volatility. Ex: as the market breaks, dealers need to sell the underlying.
This does increase the chances of a crash and a large VIX spike, but I think it’ll take a “drying up of liquidity” catalyst by dealers to actually freak out market participants. Like we said before, the ultra short dated insurance offered by 0DTEs doesn’t put much pressure on 30+ day option buying (longer dated options are much more sensitive to volatility and therefore have more potential to move volatility)
Volatility bets are on!
As we alluded to last week, large VIX trades occurred that essentially bet volatility will go up precipitously (50% to 100% higher from here) into March and longer.
News/Reports
FOMC minutes - Wednesday 1p CT
This tells us what was discussed behind closed doors of the FOMC on Feb 1st. We already know the answer since Fed speakers started their jawboning tour: “there was enough data to raise by 50bps, but the market wasn’t expecting it”
Who knows what that’ll do to markets but ride the wave if you see one.
GDP Q4 (first revision) - Thursday 7:30a CT
Core PCE - 7:30a CT
This is another inflation measure that the Fed loves to look at. If it’s bad, which it’s estimated to be (see CPI/PPI last week), the market may use this as a catalyst for downside. Hell, if it’s good, I guess we’re going to the moon!