Squaring the Circle

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:

“You can’t fit a square peg into a round hole”

Okay, we’re not some ivy league school or institute of science, but geometry is a fundamental part of human knowledge and has been at the core of problem solving for millennia (see: Mayan astronomy, Babylonian plat surveying, Pyramids of Giza, Pythagorean Theorem, etc.). Visualization helps make math intuitive.

The phrase "squaring the circle" is an ancient mathematical problem that has puzzled mathematicians for centuries. It refers to the challenge of constructing a square with the same area as a given circle using only a compass and a straightedge. In other words, the problem is to find a way to construct a square that has the same area as a circle using only geometric constructions.

Pi (π) is intimately related to this problem, as it is the ratio of the circumference of a circle to its diameter. However, because pi is an irrational number, it cannot be expressed exactly as a ratio of two integers, making it impossible to create a square with the same area as a circle using only a compass and a straightedge.

Sometimes the puzzle pieces just don’t fit!

This has led to the phrase "squaring the circle" being used as a metaphor for attempting to do the impossible or solve an intractable problem. (i.e. being a consistent, profitable trader without any bias that takes perfectly measured risks)

On this March 14th (3/14…3.14), we hope visualizing π opens your mind to a relationship between pictures and numbers!

BANG for Your Buck:

Well well well, volatility is going up…VIX tagged the 30 handle yesterday (is 50cent gonna get it right?!). Also, the volatility of volatility (vol of vol) is increasing, which benefits all long VIX options in general. But the market was a bit schizo. Lots of buyers and lots of sellers, for a net of unch’d on the day.

Dealers are clearly in negative gamma territory, meaning they hedge with the direction of the underlying movement. Volatility naturally remains elevated with this feedback loop. But, bullishness will return with volatility decreases and time coming out.

To us, this reads like a set-up for a huge move. Quarterly options expiration (opex) frees participants to take new bets…but only after stuff expires! Until then, every move is extra sensitive, and it’ll continue being a free-for-all!

Since everyone on Twitter is now an expert in valuing banks, I don’t think we need to re-hash that crap (remember, the market is all about marketing…including FinTwit).

As for our 2 cents…the Fed’s new 1-to-1 liquidity swap facility just removed the risk of “money creating banks.” Banks supposedly earn a vig by managing short term liquidity needs with long term lending assets. With this facility, the need to do that is over (albiet, temporarily)…unless you’re not a bank, then you still have to manage interest rate exposure over multiple time frames. (don’t worry, they said it’s not a bail out!)

Options Market Positioning

• 4000 = large open interest resistance

  • Under 4000, dealers will hedge with the flow of the market.

• 3900 = pivot

  • this market fights for 200 handles at a crack. Options in-flows “determine the expected distribution” of the underlying. Then we all wait to see what happens.

• 3800 = large put open interest

  • So far, it held as resistance Sunday night and early Monday, but…

• 3630

  • 5% lower and also the max pain for JPM’s hedged equity strategy

  • One of our first articles explained “how supply creates it’s own demand” and showcased how pinning a strike makes it really easy to profit when you know the counterparty won’t act.

• Volatility bets are still on!

  • Over the past few weeks, large VIX trades occurred that essentially bet volatility will go up precipitously. VIX 30/40 Call Spread, and vanilla VIX 50 Calls are some of the big bets.

  • So far, “they ain’t lyin” and “we are witnessing a baby fahckin’ wheel!”

News/Reports

• Regional Bank Failures (don’t worry, no contagion and the Fed has it all under control…just like inflation!)

• Pi Day (3/14) - CPI

  • Event volatility is at play. The tendency is to buy back short hedges, but remember, we’re in negative gamma land…if it goes south, the dealers are going to chase it down.

• 3/15 - PPI

• 3/17 - OPEX

  • Technically a “quad witching” since this is the quarterly roll. Stock Options, Futures Options, Index Options, and Futures contract roll

• 3/22 - FOMC Rate Decision / Press Conference

And for you literature buffs, “beware the Ides of March!”

As always, pursue the process NOT the profits!