Yo Pit Crazies,
We are again waiting for an economic number, this time the Consumer Price Index (CPI).
For anyone buying food or trying to staff a hospital, it’s for sure more expensive this year than last year. But the rate of change is less. If you want a used car, there is one for sale. You want a computer chip, they got’em.
I think there are many reasons why:
- No Covid Mandates or threatened mandates
- The Russian Oil Shock was absorbed by Africa and USA
- The Gov’t is not spending as much money, but still too much
- China is back to producing goodies
In short, I don’t think this CPI will move the SPX needle much. But somewhere, some way, the vol market thinks this could be a big deal.
Vol Man is living under the roof of contango.
So what the heck does that mean?
VIX Futures Are a Forward Volatility Measure
The VIX futures dates are fixed when they settle, but the VIX measure is a 30 day sliding scale.
Right now, VIX is measuring early June options, but VIX May17 future expires in a week. So the VIX future price is measured from May Expiration to Current VIX June options. This kinks the May future up a bunch, and all the VIX May17 options price off of the futures.
I can buy a VIX May17 19 put for under $1. This future is so expensive because the near term vol is so low relative to the back month vol.
I know that sounds counterintuitive, but that’s the deal. Once the CPI comes out, the future premiums should drop.
This idea came up in the Trading Desk class today. I was already running a similar trade, but with time running out today, I put on VIX puts and SPY put flies with the short strike around 400.
I will report how this turned out in the Sunday OP Newsletter. Remember I have to sell one or the other when they pay. Should be fun.
Hats off to Dejan – a Pro and long time OP subscriber – for the idea!
The Rundown
Big Money Flow
Dell Inc (Ticker: DELL) May05 45 calls closed for a 25% gain
Capitol Gains
Livent Corp (Ticker: LTHM) Jun16/May19 21/22.5 call diagonal closed for a 44% gain. Lithium stocks are moving higher again after some political setbacks for the Left in Chile with respect to nationalization, per Frank.
To Your Trading Success,
AG