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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.
BANG for Your Buck:
| 3/20/2023 SPX = 3916.64 | Handles of Movement | Implied % Move |
|---|---|---|
| BANG (intraday) | 63 | 1.6% |
| BANG (weekly) | 139 | 3.5% |
Last week, implied volatility remained elevated and sticky. When a <1% down move in the underlying equates to a 3 to 5pt vol pop (~10%+), the market is silently freaking da’ f*ck out! Remember, the market is all about marketing i.e. trying to find buyers and sellers. It will slowly shift and creak behind the scenes, while the average retirement investor will see nominal gains/losses.
The market grinds down, and has violent upswings (attributed to short squeezing / profit taking / dealer hedging / etc.) This is very indicative of a low liquidity bear market. Liquidity comes out of the system as we all “try to stay nimble.” The average Joe may see record volumes in options/futures/etfs and think everything is fine, but as we say in the biz, volume ≠ liquidity.
ES futures top of book liquidity (getting filled at a single best price) was $2m in notional or about a 10 lot. If this doesn’t freak you out, nothing will. A goddamn 10 lot!!! That’s 5 SPX or 50 SPY ETF. Knock knock, there’s no one home.
That little liquidity hasn’t been seen since March 2020 COVID markets. The cost here is transacting. BidAsk spreads are wider, so if you need to shift risk, you’re going to pay.
Corporate buybacks are in the blackout period due to imminent earnings season, so corporate VWAP (read: vee-wop) buying algos will be on pause until 4/28.
Quad Witching Results
$2.9T in equity bets expired on St. Paddy’s Day
The OPEX (options expiration) went off without a hitch, and they even pinned the 390 strike in SPY by the end of the day. You gotta love how the market finds max chaos for deliverable securities!
As dealer gamma expires, their hedging requirements also expire! This allows the market to move more freely without being dampened by dealers.
The dealers are now primed to take new bets, but as you can see from the low liquidity, it’s going to be at a much higher edge i.e. cost to the customer.
Options Market Positioning
4000 = major resistance
3900 = pivot level
3800 = some support because lotsa puts there
4065 or 3630 = JPM hedged equity strikes
These levels tend to be a magnet for the market because they are the largest open interest on the March endo option chain (March 31st expiration)
Dealers are long the 4065s 45000x, and short the 3630s 45000x
With 2 weeks left on the clock, gamma exposure for the dealers really starts to ramp up. Negative to the downside (sell as market breaks) and positive to the upside (sell as market rallies)
Effectively, volatility becomes naturally bid as we break, and offered as we rally…which is exactly what you’d expect in equities
Volatility bets are still on!
Some of the VIX 30/40 Call Spreads we taken off for a profit last week, but the lion’s share remains active.
These large VIX trades essentially bet volatility will go up at least another 50% to 100% from here.
Puts, Puts, and More Puts
The largest volume of put buying occurred last Friday.
In fact, 3 of the top 10 most put buyingest days occurred last week…looks like someone doesn’t want to be unhedged!!! Honestly, I read this as a setup to squeeze, but you never know.
News/Reports
3/22 - It’s all about rate hikes as banks are failing!
FOMC Rate Decision / Press Conference
VIX AM expiration
General Banking Issues
3/31 - JHEQX Quarterly Collar Roll
This is the 4065/3630 strikes mentioned above.