We’re going to start off today’s newsletter with a look at Crude Oil.
It sold off over 5% on the day, which was an incredibly strong move relative to the low volatility the asset has seen.
We can measure this by looking at the lower indicator. It was over a 4 standard deviation move to the downside.
When we have moves like this, they are often volatility pivots– meaning they are rarely one-off events. It also means that this volatility can start to spill over into other assets… like bonds, and stocks.
Maybe it’s wishful thinking– I make my money when the market is moving at a faster click than what we’ve been seeing all year!
The big narrative that is coming into play is the Fed rate hike. Rate-sensitive stocks such as utilities and commercial real estate are getting hit, and the commodity comeback story has been put on hold…again.
Trade #1: VMW
This is a pb2ma setup– looking for a pullback into the 50 day moving average, which coincides with the support level from the most recent earnings move.
Trade Setup
Expected Price: 86
Sell to Open Apr 82.50/80 Put Spread
Tier 1: Enter at 0.33, Exit at 0.10
Tier 2: Enter at 0.48, Exit at 0.33
Tier 3: Enter at 0.63, Exit at 0.48
Trade #2: TLT
Bonds are selling off in anticipation of another Fed rate hike this month.
There’s a few things I’m taking into consideration here.
First is the trading range TLT has been in since October. The highs are 123, lows are 116, so about a 7 point trading range. Extrapolating that down that gives an expected move to 109. Now does that have to happen all at once? No, but it’s a good starting point to work with.
The second thing to watch is the TurningPoint indicator on the lower bound.
Now we know that the historical standard deviation is 3.8%, so a two standard deviation move in a 20 day period is right around 7.6%.
If we use the pre-gap highs at 121.74, that means a two standard deviation move would be down to 112.50.
So those are our two points to start with– initializing new put spreads starting at 112 down to 109. We have two things going for this trade– a statistical backdrop as well as a clear technical pattern.
Trade Setup
Expected Price: 112
Sell to Open May 106/103 Put Spread
Tier 1: Enter at 0.30, Close at 0.05
Tier 2: Enter at 0.50, Close at 0.30
Tier 3: Enter at 0.80, Close at 0.50