This might be “it” for the pullback near term.
This has been an incredibly orderly selloff. The daily ranges haven’t been extended, and it has simply been a slow march lower. All the stocks I’m looking at are hitting support… and holding for now.
But more importantly is what I think is going on in options-land.
For nearly a month, the VIX has been persistently elevated in spite of the market hitting all time highs. Investors were buying protection, and the option market makers continued to lift the bid because they were concerned about not getting enough juice to justify holding risk into a seasonanlly volatile part of the year.
Think about the dynamic here. Say you’re an investor and you bought VIX calls or SPX puts. And the market starts to pullback.
You think that the hedge has done its job, so you close it out. That means you sell to close SPX puts.
A market maker has to take the other side, which gets them net short directional exposure, so they go out and buy some futures to even out their position.
See how that works? When investors close out hedges, it puts a bid into the markets. That’s what I expect will happen with any further selling, and it will help to provide a floor on stock prices.
Trade #1: AAPL
Planning an entry on the rising 20 day moving average and previous support. We’ve got some call spreads still open on this, so it will synthetically turn into an iron condor.
Expected Price: 217.87
Sell to Open AAPL 205/200 Put Spread
Tier 1: Enter at 0.84, Exit at 0.34
Tier 2: Enter at 1.14, Exit at 0.64
Tier 3: Enter at 1.44, Exit at 0.94
Trade #2: FB
The change in character of Facebook stock cannot be overstated. That gap down after all time highs has left psychological and technical damage imprinted, and I think that it will lead to a more volatile trading range that will take over a year to resolve before we can even consider the stock being back in an uptrend.
Because of that, if you do want to buy dips, you need to allow for wider price movement and truly statistically stretched price movement. Way too many people were aggressive selling put spreads here and I think the early dip buyers will be punished. Look for the secondary push down to the April lows.
Expected Price: 155
Sell to Open FB 145/140 Put Spread
Tier 1: Enter at 0.89, Exit at 0.49
Tier 2: Enter at 1.19, Exit at 0.69
Tier 3: Enter at 1.49, Exit at 0.99
Trade #3: COP
I want a retest of that large selloff from August. That also coincides with the 50% channel level, and the rising 200 day moving average will help to provide technical support in the next month or so.
Expected Price: 67.70
Sell to Open COP 62.50/60 Put Spread
Tier 1: Enter at 0.33, Exit at 0.08
Tier 2: Enter at 0.48, Exit at 0.23
Tier 3: Enter at 0.63, Exit at 0.38