Is VIX Going the Wrong Way Again?

Yo Pit Crazies,

 

Sometimes I wonder if the Cboe Volatility Index (Ticker: VIX) watches the S&P 500 (Ticker: SPX)

 

The SPX was down two points Tuesday and VIX was up a full point to just 17.90.

 

The “fear index” got close to Zone 3!

 

Oh my gosh, hide the kids! It’s to be Armageddon … or maybe not. 

 

For reference, there are four Vix Zones.

 

      • Zone 1 9-12
      • Zone 2 13-17
      • Zone 3 18-23
      • Zone 4 24 and above

Five-day VIX chart with one-minute candles.

 

Note that VIX traded well into Zone 2 on Friday … only to pop a bit into the close and dance around Zone 3, above 18. 

 

I’m bringing this up because it’s important when we change zones. That usually means a change in sentiment.

 

We’re at 17.5 of this writing on Wednesday afternoon, and we’ll see where we go into the close.

 

I should note that Tuesday also factored in Weekend Effect, since there was the three- Memorial Day weekend.  If you want more on the math behind it click here

 

Ultimately, we’ve seen a  little weekend and a little nerves. I won’t look for a lower SPX until we really spike above 18 and hold that level.

 

The Lesson: VIX Zones are great ways to gauge market sentiment and initiate trades. Check out our Edge Hunter system for help with that.

 

The Power Moves Portfolio:
Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K Street knowledge and my options expertise. We are aiming for positive theta trades and using that income to buy calls is the big growth opportunity.

 

Frank is cueing up Bitcoin and he likes the PowerMoves from the US Gov that regulation is more bullish than not.  I am looking at Coinbase Inc. (COIN) as a potential upside play.  Stay tuned for a Thursday trade!

 

      • Ford Motor Co. (Ticker: F) pulled back a bit, and we will take the money if we don’t see a rally this week.
      • General Electric (GE) is a play on green energy. We own two GE Sept. 17 14-strike calls for a credit.
      • Cleveland-Cliffs (Ticker: CLF) broke out and way above the strike in my spread so I took the $100 gain and bought a midterm call, one CLF July 16 21-strike call for $1.61.  Looking for a double in this call to close.
      • Our Vale S.A. (Ticker: VALE) position is back to even with five VALE June 18 22-strike calls that we own. We sold all the puts in here for a 100% return per put.  The calls are trading $.83, but unless we get a blast-off and the calls are well in the money, I am in repair mode and will close them for a scratch.
      • We own four Taiwan Semiconductor (Ticker: TSM) June 18 120-strike calls for $3.10 and one TSM June 18 100-strike put for $1.95, and have taken in $470 against them via TSM calls we sold and QQQ put spreads we closed. I started to close the June18 120-strike calls at $2.25, selling one, since that is my break even area. There’s too much up-and-down for long calls this close to expiration.
      • Palantir (Ticker: PLTR) stock briefly hit $24.75 last week as meme stocks got hot again.  I am back to even on the positions, and if I get a move above $25 I will take the win and move on since this position is in repair mode. It’s at $24.48 as of this writing.

To Your Trading Success,

 

AG

What This Big Bid On Baby Puts Is Telling Me

Hey Traders,


On Tuesday we saw the market boom higher …


Only to fizzle away, and end the day essentially flat …


So, does this mean we are in for a double top?


Is the S&P 500 (Ticker: SPX) heading for trouble, and will the Option Pit VIX Light flip to yellow?


One index is telling me the answer pretty succinctly …


Let’s take a look at skew.


Skew is the cost of out-of-the-money puts and calls, relative to at-the-money options.


There are a few ways to track it …


One way is to look at VIX-VXO.


The VXO is similar to the VIX, but it tracks options on the OEX (the S&P 100) while the VIX is based on the whole curve of the S&P 500


By subtracting VXO from VIX, I can get a pretty good idea of where skew is at across the curve …



The index differential has been on a steady climb since April.


Another index that gives me a glimpse of skew is the Cboe SKEW index…


This index looks at skew a little differently.


The index is the end-of-day price for ‘crash’ protection puts.


This index was at the high of the year on Friday, and is still super high as of today …



As you can see, small dollar puts in SPX are pretty darn expensive right now …


So what does that mean?


Believe it or not, a big bid for baby puts is bullish.


There is a high correlation between a steep SKEW index and positive market returns …


While that may sound counterintuitive, when you think about it, the correlation makes sense.


If I thought the S&P was going to tank, would I buy little baby puts?


No, I would buy meaty puts that will make money on an impending move lower.


I buy crash puts as a security blanket to protect against doomsday, not just a standard sell off…


If I have the security blanket on, it gives me the comfort to go long …


Which is probably what is being built up.


So, while at first that skew index being so high might ring the alarm bells, in truth, it actually makes me want to go for long calls, not short the market.


An alternative would be puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY),  like the ones I did today for the Volatility Edge program.


The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.


Your Only Option,


Mark Sebastian

AMC Traders May Feel The Squeeze

Hey Traders,

Meme stocks are back at it again this week, and there’s one in particular getting some extra attention …

AMC Entertainment (Ticker: AMC) was making headlines after news broke that Mudrick Capital had purchased 8.5 million shares of the movie theater stock at $27.12 … Before promptly selling them off for a profit the same day, declaring them “overvalued.”

Of course, when have Reddit Robinhood retail traders cared what Big Money’s doing? AMC barely faltered heading into the end of the trading day on Tuesday, with the shares still  managing to close above $32.

AMC hourly chart courtesy StockCharts

But that’s actually not the most interesting thing I’m seeing from AMC today …

In the option pits, there’s been some heavy trading volume at some eyebrow-raising strikes.

I think this stock could be headed for a squeeze … 

But maybe in a different way than most people are expecting. 

We know retail traders have been targeting these meme stocks in an attempt to provoke a short squeeze, given the large amounts of shorted shares held by institutional investors.

However … AMC traders may be about to see a different type of squeeze play out.

First, let’s take a look at AMC in the option pits.

I’ve been noticing some really heavy buying volume on call options with strike prices that are quite a ways out of the money.

For example, take a look at the June 4 73-strike call.

(Reminder: AMC closed at $32 on Tuesday — just three days before these options were due to expire!)

AMC June 4 73-strike calls saw 60k trading volume with a delta of 0.06.

For this option to expire in the money, AMC would have to tack on more than 127% over the next three trading days … And there’s about a 2.5% chance of that happening.

But the trading volume still hit 60,000 contracts!

And that’s not the only peculiar option buying volume I’m seeing.

I’m seeing similar action at the June 4 50-strike call, with 33,000 contracts crossing the tape …

And the perhaps less outrageous, but still far out-of-the-money June 4 40-strike call, which saw over 75,000 contracts traded …

What’s going on here? What does all this call buying mean? Is there really someone out there who expects AMC to shoot up 127% by this Friday?!

Not quite.

Don’t get me wrong. AMC has been making some nice moves on the chart – I’m not trying to imply it’s not. But it’s not making these kinds of moves. By Friday.

Rather, this looks like an attempt to trigger a gamma squeeze. 

Let me explain.

A rise in call-buying volume raises the delta of an option. 

In simple terms, delta is the rate at which an option’s price changes relative to a price change in the underlying equity. 

For example, if an option has a delta of 0.5, this means the price of the option will increase by $0.50 for each $1 that the underlying increases. A delta of -0.5 indicates that the price of an option will decrease for every $1 change in the stock price.

Typically, an at-the-money call will have a delta around 0.5 (-0.5 for a put option). The further out-of-the-money an option is, the lower the delta, and the farther in-the-money an option is, the higher the delta. A higher delta indicates a higher probability that an option will expire in-the-money.

When market makers sell options, they don’t just sit their naked short call options, they hedge. Delta hedging is an important way that market makers reduce the risk they take on by selling options. They typically buy stock in the underlying equal to the delta of the option, giving them a delta-neutral position. That way, if all of their sold calls expire at-the-money or in-the-money and are exercised, they already have some number of shares on hand to fulfill these potential obligations. However, as share prices rise and the option gets closer to expiring in-the-money, the delta also rises … forcing market makers to buy even more shares.


Gamma indicates how much the delta will change as the underlying stock rises or falls in price. Gamma is highest when an option is at-the-money, indicating that a change in the underlying stock will have a larger impact on the delta of an option than when an option is farther out-of-the-money.

Now, as the delta of an option gets higher (indicating the option is getting closer to being at-the-money), market makers who have sold all these calls will be forced to buy the stock, as a way to make sure their sold call positions are hedged.

And of course, this pushes share prices higher. 

And the higher share prices climb … the more market makers have to hedge, because more strikes are pushed closer to being in-the-money.

And in AMC’s case, the delta on these options is just way too high! They don’t make logical sense. (The delta is circled in red above!)

These options players have goosed the 50-strike calls to a 0.19 delta … And those do not have a 0.19 delta to them by Friday. 

But the higher the delta, the more market makers will be forced to hedge …

What’s more, the vol on these options is also starting to get incredibly high. On Friday, the implied volatility (IV) of the June 4 50-strike calls was 415, and now it’s all the way up at 452 – that means implied volatility rose by nearly 40 points in a single trading day. 

All in all, this is something I will be keeping an eye on.

To me, it looks like the making of a gamma squeeze. 

We will have to see how these options play out into the end of the week.

Your Only Option, 

Mark Sebastian

!Warning!

Hi Shoppers,

 

You’ve heard the saying that once a stock trades past a certain point and is almost to a rounded number — say $100 — it is bound to get there?

 

Well, that does, in fact, usually happen

 

Check out the SPDR S&P Oil & Gas (Ticker: XOP) chart below. See how it has broken out and is heading to $100?

 

 

XOP closed yesterday at $94.83, and I think it is heading to the century mark.

 

I will buy the June 18 95-strike calls and sell the June 18 100-strike calls. I’ll pay up to $1.80 for this five-point spread.

 

As you can see, the implied volatility of each option is roughly the same, so I’m not getting that extra edge …

 

But since the 95s are more than $3, I would like to bring my cost down.

 

 

I will take my loss if the spread trades down to $1.20 and begin to take profits at the $2.90-$3.00 area.

 

Trade Review

      • AMC Entertainment (Ticker: AMC): I took off my last spread yesterday at $5.65 for a total profit of 115.
        AMD gapped open a buck and proceeded to trade up another $2. I waited and bought the June 04 82-strike calls for $1.35. They have closed considerably lower at $.51. If the stock does not follow through and trade higher today, I will get out immediately.
      • Quantumscape (Ticker: QS): I paid $1.50 for the June 18 26-/31-strike call spread, which closed just a tad lower, but the chart still looks to me like a bull flag.
      • I recommended the Uber (Ticker: UBER) June 18 50-strike puts paying $1.50, which weren’t looking so great. However! I still think the stock is rolling over and going lower. I will keep a close eye on these and get out if the stock trades above $52.
      • I still have the Taiwan Semiconductor (Ticker: TSM) Oct. 15 120-strike calls. I will sell the June 18 125-strike calls against them as the stock trades closer to $120 and these calls are trading over a dollar. After selling the April 16 130-strike calls and the May 21 125-strike calls, I am up 11% on this trade right now.

 

Thanks for Reading … See You Next Tuesday!

 

Licia Leslie

Cash Is Trashed

Hey There Income Hunters,

 

What makes team sports so interesting to me is how successful sides adjust strategy as circumstances change during the game.

 

Whether it’s the pitcher, pass rusher or power play — if players and teams don’t make adjustments, they usually get slaughtered. 

 

Well, it’s no different trading.

 

If #IncomeHunters don’t adapt as investor psychology shifts, they (you!) run the real risk of getting slaughtered.

 

And guess what …

 

It’s time to adjust.

I have good reason to believe the dollar will collapse soon.

The latest sign pointing that way is that central banks in Canada, China and the U.K. are tightening monetary policies as the Fed continues to be ultra-easy with its approach to U.S. currency.

As you can see in the graph below, China’s yuan is strengthening to the dollar — and it’s fueling a non-dollar equity rally.

Those money flows are dollar bearish since global investors will sell their dollar reserves to invest in non-dollar equities…

The graph below shows the damage on the dollar so far — and we still have a long way to go.

 

The $89.43 level was the low close in January. A close below that would trigger further selling of dollar assets, which would take the U.S. Dollar Index (Ticker: DXY) down quickly to 88.62 and ultimately 78.88.

Three Macro Forces Driving a Weaker Dollar

1)    The global reopening has a much larger impact on global growth overall than it does on the U.S. itself. Some $64 trillion in global GDP for non-U.S. countries will give a boost as economies come back, especially with Brexit out of the way and trade restrictions reduced.

2)    The central banks leading the way as inflation surges globally are the People’s Bank of China and Bank of England as they fight inflation by tapering and pulling back credit. This will strengthen their currencies at the expense of the dollar…

3)    U.S. fiscal and monetary policy continue to add pressure on the dollar internally by letting inflation run, which reduces the wealth inside the U.S.

These are all critical points because they point to a changing world order.

Developed countries outside the U.S will turn into sellers of dollars and Treasury bonds. The Fed will be happy about the extra pressure on the dollar since it fuels the inflation they want so badly.

However, the Fed will not be happy about the pressure on U.S. bonds and they WILL be forced to respond with yield curve controls (YCC), meaning to hold down the yield on bonds.

US 10-year Yield Projections from the Congressional Budget Office (CBO) 

The CBO projects that by the end of the decade, the yield on the 10-year bond will rise to 3.5%.

But the Fed will never let the rates rise that high.

In the 1940s, even with rampant inflation as high as 8%, the Fed held 10-year rates below 2.5% — and they held them there for most of the decade.

The CBO also projects that in 20-years, 30% of all fiscal revenues will be used to pay back interest on government debt, up from 8% today. This will pressure the Fed to monetize the debt with YCC to slow down the inevitable rise.

DON’T MISS IT: Holding rates down while inflation rises will fuel even higher inflation. The necessity to keep long rates low is very bullish for precious metals and bearish for the dollar.

Cashing in on “Cash Is Trash” 

      • Be short TLT, EDV, ZROZ and long ultra-short bond ETFs: The market will force the Fed to pull the trigger on yield curve control by selling bonds and pushing rates toward the 2% target, which may be the level at which they would launch YCC.

Just to give you an idea on trades being done to capitalize on the move to high rates and lower prices in bonds, here is a look at Michael Burry’s (aka big short) position’s courtesy of the Bear Traps Report (May 22). Burry must have read a couple of my Power Income letters.

 

      • Puts on the iShares 20+ Year Treasury bond ETF (Ticker: TLT), equivalent of 1.27mm shares
      • Calls on ProShares 20+ Year Treasury Ultrashort ETF (Ticker: TBT), equivalent to 2.54mm shares
      • Calls on the ProShares 20+ Year Treasury Ultrashort ETF (Ticker: TTT), equivalent to 100K shares
      • Calls on the Direxion Daily 3x leveraged 20-Year Treasury Bear ETF (TICKER: TMV), equivalent to 38,400 shares
      • Outright long in the ProShares 20-Year Treasury Ultrashort ETF (Ticker: TBT), amounting to 300,000 shares

 

Burry was in the press not long ago talking about U.S. hyperinflation similar to 1920s Weimar Germany — and YCC is an event that brings the potential for hyperinflation into the picture…

A weaker dollar means higher commodity prices

There is global demand for commodity prices and that is what makes this period of inflation so serious. A massive amount of money is flooding the economy, along with a real demand for a limited supply of raw materials.

Materials most in-demand include: Copper, palladium, platinum, nickel, coal, uranium, oil, and natural gas. Because of the ongoing dollar debasement, silver and gold will be in high demand — especially as digital currencies are launched by global central banks who will demand gold as a potential backup.

Long/Short Equity Strategies 

Value really matters in an inflationary world, especially because we never know when a sharp correction could occur. So, long undervalued stocks against short overvalued stocks is a great strategy. Also, long value versus short growth will be a preferred strategy for the next couple of years.

Bring It Home

Like all long-term trends we will see violent corrections along the way, and they’ll likely come when we’re in between stimulus events.

The market is going to constantly need stimulus to remain at elevated prices, hedging or closing some of your core positions during lulls will help to maximize returns…

We may hit a slowdown in the next couple of months as the low base inflation effects from last year runoff.

Later this morning, I’m going to highlight a great long/short trade and run through the fundamentals and technicals so please join me at 8:45 for Power Income LIVE.

Until then …

Live a Trade With Passion My Friends,

Griff