The markets are at an interesting crossroads.
Obviously, we could say that every single day… but where we sit right now has a different flavor to it. The S&P is within spitting distance of all time highs, and there was enough of a flush last week to “refresh” the trend.
Yet underneath the surface there is fear. Lots of it. The VIX is at a massive premium to actual market vol, and we continue to see hedges put on in stocks and volatility.
Market participants are treating the next few days as an “earnings-like” event for the market.
Two things are going on. First is the UK elections and whether they’ll be able to push Brexit through cleanly. The second is a US/China tariff deadline set on December 15th.
We don’t know if the tariffs are going into effect or if they will push them off into 2020. That’s what has investors so skittish and why the VIX has continued to stick around 15 even though the dip is already over.
There’s no crystal ball here– we don’t know the outcome, and more importantly we don’t know the price reaction to the outcome.
The only bet I would make is that the downside, if there is any, will be limited. The market is too overhedged into the end of the year to bring any true volatility to this market.
Here’s how the mechanism plays out. If you own VIX calls, and the market sells off… you don’t hold onto the VIX calls forever because you know how quickly the market reverts.
You close out your VIX calls– which means the market maker takes the other side and gets net long VIX. To balance that out, they will go and either short VIX or get long SPX.
Closing out the hedges provides a natural support to the market. And if too many are hedged, it will be VERY difficult for the market to see follow through to the downside.
Any dip over the next few days should be viewed as an opportunity, not the end of the world.
Trade #1: JPM
Looking for a retest of the internal pivot level and trendline support.
Trade Setup
Expected Price: 131.26
Sell to Open JPM Jan 125/120 Put Spread
Tier 1: Enter at 0.67, Exit at 0.15
Tier 2: Enter at 0.938, Exit at 0.238
Tier 3: Enter at 1.206, Exit at 0.256
Stop Out If Close Under 125
Trade #2: SQ
SQ is retesting the breakout level and the rising 50 day moving average is catching up with price. This stock may go sideways for a while but I expect that the trend has shifted to up. I’d like it at the current price but the option spread doesn’t offer good risk/reward so we’d need to see a deeper pullback for a good entry.
Trade Setup
Expected Price: 64.78
Sell to Open SQ Jan 60/55 Put Spread
Tier 1: Enter at 0.7, Exit at 0.18
Tier 2: Enter at 0.98, Exit at 0.29
Tier 3: Enter at 1.26, Exit at 0.32
Stop Out If Close Under 60
Trade #3: SPLK
Great move post earnings, it’s consolidating its gains and I plan that the stock will continue a rally into the next earnings event.
Trade Setup
Expected Price: 145.9
Sell to Open SQ Jan 135/130 Put Spread
Tier 1: Enter at 0.85, Exit at 0.35
Tier 2: Enter at 1.19, Exit at 0.54
Tier 3: Enter at 1.53, Exit at 0.66
Stop Out If Close Under 133.61