BY ANDREW GIOVINAZZI

November 3, 2023

Yo Pit Crazies,

In yesterday’s OP Newsletter I wrote this:

“Also, I don’t see a parabolic rally, but the market is planning on one. In the Pit Stop I covered the bid for upside vol. Upside call butterflies could play equally well in the big indexes.”

Dang, just because I wasn’t right, the bid for upside options was very right.

To be honest, I thought this would happen last week when Microsoft Corp (Ticker: MSFT) earnings came out but it happened this week instead. I underestimated the Middle East conflict getting traders worried, but once the tanks rolled in last weekend I closed the last of my SPDR S&P 500 Trust (Ticker: SPY) put spreads Monday and VIX collapsed all week.

SPX 2 month chart with 30 day  IV

The Middle East situation is still miserable and sadly it seems it will be with us for a while. On a positive note corporate earnings were pretty good save for Apple Inc (Ticker: AAPL) as I write this. The AI darling Palantir Technologies Inc (Ticker: PLTR) went nuts.

The question now is, do traders see a lot more upside for today?

Upside Volatility in SPX Barely Moved

On the SPX chart above the drop in SPX IV was pretty dramatic. There’s really only a couple of points max in SPX IV to drop any further. That last vestige of IV might drop next week, and I think it was there for AAPL earnings. From what I can tell, earnings came in better ,but revenues are lower; so I don’t see AAPL powering a rally tomorrow. However, when I look at the IV on the SPX Dec04 4400 calls, they only dropped .20 of a volatility point today.

That’s nothing for an option 1 month out, 100 points out of the money.

SPX Dec04 4400 call price and volatility chart for the last week

Traders were still waiting for an upside shock from AAPL.  They are not likely going to get it.  This week should set up well for index iron condors or some short term butterflies. With AAPL not blowing the doors off, some upside should come out of SPX IV and VIX should drop to the mid 14s.

Also, I think the market is going to find other stocks besides the Magnificent 7 after J-Pow was less than enthusiastic to raise rates now that the bond market has taken over that job. Upside skew still says some rally but it should slow down some.

To Your Trading Success,

AG