And just like that, the volatility event earlier this week is just a memory.
Markets finished up 2% because that’s what this market wants to do. It’s COMPLETELY different compared to what we saw at the end of 2018– instead of having no bid, there are aggressive buyers into any selling, as evidenced by the previous two days’ price action.
When we see moves like this, there is a tendency to retest the lows. It doesn’t have to happen overnight, generally it takes a few weeks.
It’s very possible that the market just jams back above 3000, but I don’t think it’s probable.
Let’s talk tactics. If there was a position you have that you absolutely hated on Monday, you probably just want to cut it and move on. It’s a lovely psychological trick, especially with credit spreads that have large drawdowns when the market sees sharp, non-reverting movement. Consider your least-favorite position right now and how you’d feel if we came back sub 2850 in 2 weeks.
As for shorting… yes, it feels like a layup. But shorting, especially with call credit spreads, is a HUGE pain to do. This has to do with the premium you can get on call options vs. put options, and how these kinds of squeezes can move further and higher than you think.
You can get away with selling call spreads, but my bet is that you want to see one more push after this before you enter. Wait for the early shorts to get stopped out, and that will be a better entry.
Trade #1: BIDU
Weakest stock in the market. I want to short the gap fill.
Expected Price: 107.12
Sell to Open BIDU Sep 120/125 Call Spread
(These prices may change as implied volatility heads lower into any rallies. Be aware!)
Tier 1: Enter at 0.90, Exit at 0.40
Tier 2: Enter at 1.20, Exit at 0.70
Tier 3: Enter at 1.50, Exit at 1.00
Stop out if BIDU closes above 116.38
Trade #2: CMI
Another global trade/China proxy that looks like hot garbage. Same theme as BIDU above — short the gap fill, scale in, and bail if it reclaims key levels.
Expected Price: 158.68
Sell To Open CMI Sep 170/175 Call Spread
Tier 1: Enter at 0.60, Exit at 0.10
Tier 2: Enter at 0.90, Exit at 0.40
Tier 3: Enter at 1.20, Exit at 0.70
Stop out on Close above 166.8
Trade #3: CAT
Same as CMI. Looking for a retest of key levels.
Expected Price: 126.77
Sell to Open CAT Sep 135/140 Call Spread
Tier 1: Enter at 0.65, Exit at 0.15
Tier 2: Enter at 0.95, Exit at 0.45
Tier 3: Enter at 1.25, Exit at 0.75
Stop out on close above 134.8