Hey There Income Hunters,

The market bears are firmly back in control as put buying and call selling have dominated this week.

The catalyst for this vol ramp up was Blackstone’s (Ticker: BX) decision to limit redemptions in its popular real estate income trust, BREIT.

You see, withdrawal requests in October exceeded the trust’s monthly limit of 2% of its net asset value and its quarterly threshold of 5% …

And since mid-November, Blackstone is down almost 30% – with a  a new low for the year put in yesterday.

The crises keep on coming  for the Federal Reserve, so  it will be interesting if Jerome Powell changes his tune at next week’s FOMC meeting.

Today, we’ll look back at how this Blackstone episode is similar to Bear Stearns in the 2008 financial crisis …

And how it may be the tipping point now, as well.

We Have Ignition

During every financial crisis there is a specific event that ignites fear in investors and accelerates the down turn …

During the 2008 financial crisis, that event was the Bear Stearns mortgage-backed securities hedge fund going bankrupt and losing more than $20 billion  of investor money.

Obviously, today the numbers are much larger and, in Blackstone’s case, we are talking about $69 billion. Plus the firm has roughly  $9 billion in immediate liquidity and another $9 billion  in debt securities.

However, we are in the midst of a real estate crisis. And although rental housing has held up so far, as the economy enters recession and unemployment rises that could change. A serious hit to residential home prices would be devastating for  Blackstone.

What’s the Trade?

I have been playing the home builder ETFs from the short side for much of this year and added a put diagonal on the iShares US Home Construction ETF (Ticker: ITB).

Many of the US home builders are held in ITB and it provides diversified exposure to the sector.

Here is a look at the technical set-up for ITB …

The critical turn in ITB is a shift below the gamma pivot. When the market moves below the pivot, dealer option positioning shifts to delta-hedged selling of stock into a downtrend.

This shift increases volatility which accelerates a downtrend. The target would be the put wall, otherwise known as the  largest negative gamma strike, which is down at 56. 

Any back test of the 60 level is a great opportunity to enter into a bearish option trade.

Remember: When a stock crosses over from a positive gamma regime (above the gamma pivot) to a negative gamma regime (below the gamma pivot), it changes the way option dealers hedge their delta-hedged book. In a positive regime they are sellers on rips/buyers on dips. In a negative gamma regime they are buyers on rips and sellers on dips. A negative regime is an opportunity for traders who follow dealer option flows to gain the edge over them.

Bring It Home 

This week has been a great example of how quickly sentiment can turn. It is also a good example of why you need to get out in front of the market.

You are better off setting up bear trades when the market is up, which allows for an advantageous location that provides good risk/reward parameters.

TheCPI report and the FOMC meeting are set for next week.Volatility will remain high into those events, followed by a massive option expiry on Dec. 16. 

By then we will have a lot more information and can determine if there is still a chance for a Santa Claus rally. 

Stay tuned and as always …

Live and Trade with Passion My Friends,

Griff