Will the CPI create the biggest rally of the week?

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

November 14, 2023

Yo Pit Crazies,

Mark and I went live today in the Trading Desk with his quarterly UVIX trade.

I got a question over the chat today in the Delta Strike class about what is skew.

I have to explain that some questions go by me because I have been talking about these subjects for 30 years so they seem second nature.

Then I realized that not everyone has been talking about options their whole adult life.

It is like when I watch some YouTube woodworking video for the 1st time.

I need to see it several times to get the gist of it.

Then I still screw it up and figure it out the 2nd time I do it.

Well option trading is a lot like that.

The purpose of an option trading service is to make money first but really is the service teaching you how options work?

We try hard at Option Pit to teach our students how options work. Below is a picture of Skew.

There are several things to note but if you never looked at skew before you would not know what it is telling you.

Hint: Rhymes with CPI

Skew prices the next move in the underlying

All that means is the market tends to move faster on the way down than the way up. Black Scholes, the option model that changed modern finance, assumes just a single volatility to expiration. The skew corrects for short term movement.

The blue curve was the open implied vols and the orange line was the closing implied vols.

I highlighted the gap at the lower end of the curve because there was a slight uptick in downside, put vol, in the SPX by the end of the day.

The upside vol did not really lift like they did with the Jpow testimony and the prior weeks rally.

EH skew light for SPX Nov21 cycle

For now, going into the CPI for this morning traders are bidding the downside up so likely they worry more about SPX dropping than launching especially after the huge moves of the last two weeks.

That is the IV moving higher on the downside than the upside.

Index skew moves OTM put to ATM, ATM and ATM to OTM call. By the close on Monday the downside was flexing most.

If the CPI comes in hot, expect a down opening, maybe 1% or more but if inline, just a slow grind higher but 4500 is easily in the cards by Thanksgiving.

I set up a trade in OP Mentoring (Call us for info on mentoring 1-888-872-3301) that was theta positive but long “smile” from 4350 and higher.

If all this does not make sense, join me in class or reread a few times. It works for me.

To Your Trading Success,