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- Setting Your Expectations
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!
Quote of the day:
"Americans rejoice as things are only 6.5% more expensive than they were just one year ago!"
-Doug A. Boneparth via twitter
That's right, Doug E. Fresh! Both the bears and the bulls have a reason to rejoice! (everyone except for the consumer) And as we pointed out yesterday, volatility had to come off!
Think about this for a second, if the bulls (market is going up) AND the bears (market is going down) are both certain each are correct, how could there be volatility i.e. uncertainty in the market?
Fundamentally, this is why volatility increases or decreases. Expectation of uncertainy always varies; nothing is absolute in trading. Basically, how much do you not know?!
Today, we are going to explore how to decipher the market's expectations while analyzing this latest trading session and Inflation report (CPI).
Oh, and for those who just realized that Chicago sports teams are named after trading terms (Bulls and Bears) ...you're welcome!
BANG for Your Buck:
| 1/13/2023 SPX = 3983.17 | Handles of Movement | 1-Day Implied % Move |
|---|---|---|
| BANG (intraday) | 47 | 1.2% |
| BANG (weekly) | 104 | 2.6% |
Take a peak at yesterday's newsletter and you'll see daily and weekly BANG have both decreased.
Oh and as a reminder, a week ago, the market was nearly 200 handles (~5%) lower! (I will slap anyone who says "the Santa Claus rally just came a little late this year")
What does this tell us?
The catalyst for anticipated uncertainty...
Is the market complacent? Is it just taking a breather for ML Keg Day? lol, maybe before its "hair is on fire" again.
Regardless, both sides think they are winning! And we all know that can't be the case for long!
Determining Expectations: Dissecting 1/12/23 Inflation Report
Let's set the stage:
1/11 End of Day (EOD)
Daily BANG = 53 handles
EOD Option Market implying ~80 handles of movement for the next 24hrs (we'll dive into this more at a later date)
CPI report releases 1hr before market open on 1/12
Here's how we read it (and you should too!):
The option market is implying that the pre-open move is expected to be ~ 27 handles [80 - 53 =27]. This literally means, the market must open 27 pts higher, or 27 pts lower than where it closed yesterday. Yesterday's close = 3969.61, so expected opening price = 3996 or 3942. This is referred to as a "gap open"
On the open, the range expectation for the rest of the day is still 53 handles
If the gap doesn't happen, you guessed it, volatility must decrease because that means the uncertainty priced-in by yesterday's option market was incorrect!
Wow, look at those numbers?!
Who gives a sh*t about those numbers?! You're not an economist (and thank sweet baby Jesus for that! "Look at me, I'm taking wild @ss guesses to 'forecast the economy' with no money on the line")
The answer is NEVER in the numbers... it's in peoples' pants!
You are trying "predict" what other people will think those numbers mean.
Look at how our expectations played out?!
The market DID NOT GAP OPEN
It "wobbled" open at around 5 handles lower
Instantaneous volatility repricing. Look at the bottom: yellow horizontal line quickly becomes green line
Intraday BANG NAILED THE TRADING RANGE
The purple box was the expected trading range predicted by the BANG. The market nearly touched the bottom in the AM, and near the high, it was prairie-doggin' it (just like Chris Tucker in the above gif)
Make Me a Better Trader
We're not even close to the point of "profiting by knowing these expectations", we are baby stepping intuition so maybe one day you will be!
Why did we say both Bulls and Bears were right?
Bull Case
CPI is inline and on a downtrend!
"Guys, it's only 6.5%, not like in June at 9.1%"
The housing component looks worse than reality because it lags more AKA inflation is actually lower than the report!
Inflation is dropping faster than stock earnings are so... stonks to the moon!!!
Bear Case
Inflation only fell inline because of the gasoline component (which everyone knew was falling)
Prices of services remain a problem. Removing energy, services cost 0.5% more than last month! (I don't know about you, but my rub-n-tug guy's rates are tru da roof!)
That doesn't seem like a downtrend in inflation!
This is verified in the price action: choppy session that didn't stretch its legs outside the betting market's expected range. It's a tug of war.
Bull or bear...it's all SH*T! You don't need to be an economist and decipher the numbers to be a profitable investor/trader/gambler.
If you are NOT following, reading, or deducing these signals, you are at a severe disadvantage. Options positioning and management is hard, there is no easy way around that. But understanding what those maniacs are telling us can be simple. This the purpose of the Jumping Cholla!