The following are a few of the futures contracts I watch:
As I’m writing this the SPY is falling and Gold/Silver/Oil futures are rising. I’m reading this as a warning sign for the markets. I spoke about the VIX recently, here.
One explanation for this divergence is inflation. Central banks are printing, cash is being hoarded, the dollar is rising and corporate profits from europe are therefore vanishing. Add Greece debt to the mix and the strong possibility that they default, you add the inflation worry to the list and talking points for politicians, media, and market watchers.
Now take gas prices which are starting to come up as an election issue, even a war issue. Frankly high energy costs are a good excuse for the market to pull back, don’t forget that the media will be playing this up, mixed with war mongering, and as an election issue that’s low-hanging fruit and an easy way to scare off the recent retail investors market participation.
As a trade idea a SLV 40/50/60 butterfly at Jan expiration is one I’ve written about here and I still think this is a very prudent trade. Keep a close eye on USO as well.
Complacency is the adjective I would use to describe the current state of the markets. With the exception of GLD and SLV the markets feel less paranoid than they should, less afraid. Maybe there’s reason to be optimisitic, apparently the ECB has things back under control atleast in the credit markets. But there’s a few charts which are telling me, watch out…
Take the VIX which is sitting at nearly 1 year lows. Doesn’t it seem like something is going to happen which will motivate some insurance buying? Take Syria, Greece, the US debt politics, Iran, corporate earnings, etc. There’s a fair amount of risk still in front of us. Straddles might be the order of the day, or VIX futures?
Look at the SPY and depending on your timeframe, some pullback here can only be healthy. We’re also sitting at some high range resistance. I wouldn’t be surprised if we bounce off this 135 level on the SPY.
I spend a fair amount of time dissecting option flow for the following reasons:
Copying from another can be the highest form of flattery
Institional traders know a lot more than I do
Puzzles inspire me
Yesterday I stumbled on an option trade in the Silver ETF, SLV which has intrigued me for the last ~12 hours, a call butterfly at the 40/50/60 Jan 13 strikes. IV at 42/44/46 and the risk profile looks like this:
SLV is at $29.29 so this trader finds maximum profit at 50 or a 59% rise in SLV over the course of the year. Remember, the expiration is 11 months out. Now look at the yearly chart for silver:
This trader is betting that before the year is out $SLV will retrace it’s past year highs. On first glance I couldn’t quiet understand why anyone would want to take this trade. It cost $0.70 (x 10k) or $70,000.00 and granted if SLV tests last years highs the profit on this trade would be a factor of 10. So… Still why would you make this trade? A market makers hedge against something I don’t understand? Could it be a hedge against a short futures position? A pure macro play assuming Silver becomes a safe haven? Wouldn’t a long call with lower strikes or a bull spread at lower strikes bring the same risk reward? If anyone that reads this has any idea, I’d love to hear.
Playing this market recently has come down to two problems: debt (macro) vs. earnings (micro). On the earnings front, you’ve a lot to follow, even in a down market. Finding strong cash flow, strong balance sheets, small/mid/large cap hasn’t been so difficult. The issue is unemployment and the ongoing macro problems keeping a lid on the continued release of positive earnings.
If you read this blog you’ll know that I’m distracted by technology stocks.
Any good news on the debt (macro) front is going to boost this market. That’s the prevailing sense and logically, good news should boost the market. We’ve waited so long now that the pop will be a good one. The truth is good news could come from either the US or Europe. That news doesn’t even need to be ‘super good’, just ‘decent’. Whether it is valid/real or not is another discussion… It probably won’t be, but that’s for traders with a longer term vision than mine. The reality is that the US will have an easier time releasing decent news and sooner (or later) the Republicans will get off their high horse. I’m embarrassed with that debate. But again it’ll be ‘easier’ for the US to lead the markets here. The EU is turning in circles and it’s the summer… Here’s a good graphic explaining the risk of banking and trade contagion. (The Washington Post)
So what should you trade in this market? Fundamentally, any good news will have a stronger positive effect than normal. Earning plays are working very well now. I’d watch option volumes closely before earnings and play long straddles. WYNN was hot today and is a good example. GOOG was another last week. Three stocks that release tomorrow after the close: AAPL, VMW, and YHOO would be good ones to consider. YHOO though is seeing lots of short interest. Be careful. The run up in AAPL today gives you an idea of expectations. I’m staying away from Financials which are being strongly effected by the worldwide macro worries but playing SLV and GLD in response.
The big trade yesterday was $GOOG . Up 12.77% ($67.50) to 596. There was a nice option trade with 1000, 580 calls passing. That trade netted over $1,000,000 today. The calls were way underpriced at about 10% premium… Yesterday, I was thinking there was so much positive expectation, that I’d stay away (or go contrarion…)
I’m still watching $SLV and $WYNN, both for different reasons: $SLV is seeing buyers return with uncertainty, $WYNN is overbought. The $WYNN options are expensive but it seems to be bumping up against strong resistance at 160. If you’re bearish or hoping for some pullback, one possibility would be a Aug 155/145 Put Vertical for about $3.00. Break even at 152. Earnings are July 18th.
Contradictions…Remember May when everyone was buying Silver? In May you couldn’t find an entry.The volume was elevated and today SLV bounced nearly 6% to 37, $GLD only 1% to 154, the question is, are we seeing a replay of the May run? We saw this morning some wishful thinking for QE3, which has boosted stocks. But investors are running again for $SLV, quickly. The Idea is, if $SLV holds 36.25 through say Monday. I’d look at getting bullish on SLV. Probably with an Aug/Oct calendar spread at 40. It would cost $1.10 today. I’m going to watch if we test the 36.25 levels over the next few days. There’s a few still trapped in the May runup and they’ll be selling today.