This looks interesting on the long side…
Big Weirdness
In This Environment, “Teenies” Are Your Friends
I have to confess, this market has me puzzled. Although I am still a “sell every bounce” proponent (I have my own wing at the Betty Ford Put Center), Wednesday’s rally, albeit on the back of some smoke-blown-up-the-skirt comments from an “anonymous official” regarding “a possible end to interest rate hikes in the near future” was very impressive.
It made me think that we might just coast into expiration near the lower end of the summer trading ranges, 1200ish in the SPX, 1580ish in the NDX. Wrong! The market turned tail and got “rinsed” yesterday like Wednesday never happened:
SPX
Yesterday was a parallel day in the SPX, with the opening corresponding to the previous day’s close, and the closing corresponding to the previous day’s open. This is really strange action, and it leaves the SPX below the London Bombing lows of July. Also note the little red line at the bottom. That is the ratio of 10-day historical volatility to 100-day historical volatility. It is reading about 150%, which is a high state of agitation for an index, although we are coming off of an extremely dull summer.
In addition, volatility itself is in a high state of agitation. In the chart below, you will see that the volatility of the VIX itself is rocketing, with the 30-day historical volatility of the VIX up at 105% (the blue line) and a volatility ratio of 175% (the red line)!
VIX
When “volatility gets volatile” it is the cheap options, the “teenies” as we used to call them, that are most valuable, because unlike at-the-money options, their sensitivity to volatility levels (vega) is convex, meaning that when volatility rises, their vega rises, and when volatility falls, their vega falls. By owning some “teenies” you get longer volatility as it goes up, shorter as it goes down.
Owning a slug of cheap options can also give you scalping comfort by allowing you to step into the face of these ferocious swings, knowing you have a backstop. Think of them as the cover charge to join the party!
By the way, I don’t hate everything. Some retail stocks look interesting from the long side. Everyone hates them, so it makes sense. Buy a dip, take a trip anyone?
TGT
Joe Corona
Joe Corona is a 23-year veteran trader who makes his living trading options and other derivatives. Mr. Corona has been a floor trader on numerous exchanges including the CBOE, CBOT, and CME. Joe most recently spent 4 years as Head Trader for Market Wizard Tony Saliba at Salibaco, a proprietary trading firm. He has also been an options instructor for the International Trading Institute where he has trained hundreds of options and derivative traders for major institutional trading desks worldwide. Joe is the Director of the Asia Pacific region for CDLS Consulting, LLC which specializes in trading U.S., European, and Asian options and derivatives.