Hey There Income Hunter,
It’s hard to believe that the volatility priced in for yesterday’s number would be realized … but it was.
The rally was short lived as the market immediately took out the S&P 500 Index (Ticker: SPX) 4,100.51 high by a smidge and then made its way right back down to the 4,000 strike.
In this crazy world of bots and algos it was as if the machines saw the numbers first – that is how fast the market soared over 2.5%.
Now Powell will get a turn to move the market.
And with SPX stuck around the massive 4000 strike, just a couple of days away from the year’s largest options expiration, he better come loaded for the Q&A.
Today, we’ll look at Powell’s likely message and stocks that may be heavily impacted by Friday’s OpEx.
CPI Report
November core CPI rose 0.20% month-over-month versus expectations of a 0.3% rise. This was the smallest increase since last August as the year-on-year rate fell another three tenths to 6.0%.
The internals were a bit mixed, with shelter rebounding as the owner’s equivalent rent (OER) rose .68% vs. .62%, while a 3% drop in airfares contributed to the core reading.
Headline CPI rose 0.1% (vs. consensus of +0.3%) on higher food (+0.5%) but lower energy (-1.6%) prices.
Powell knows this is a good report. However, we are still above 7% on the headline and wages and shelter are not showing signs of slowing down, so don’t expect a dovish pivot.
Yet …
It’s All About the Dots
The .50% rate hike is locked in. Where it may get interesting is in the Fed’s infamous dot plot, where every member gets to project the path of future policy moves.
The big question is does the CPI report remove the risk of another .50% rate hike in February?
The market pricing shifted right after the release of CPI to reflect a 50/50 chance of a .50% hike in February, down from a .75%.
So, that is what you should look for in the dot plot and reading between the lines during the Q&A.
One more hike in 2023 may be the call and the key is whether it is .50% or .25% …
Dec. 16 OpEx
On Friday, nearly $450 billion in option deltas will be expiring and the delta-hedged stock positions will have to be unwound.
This will impact stocks with a high percentage of options expiring. Here are a couple of stocks that will be impacted by Friday’s OpEx that I traded yesterday …
iShares High Yield Corporate Bond ETF (Ticker: HYG)
HYG has been a favorite short of mine this year. The ETF holds junk debt of risky corporations and I expect to see new lows in 2023 as defaults and unemployment begin to rise.
The ETF has also accumulated a large amount of call positions in the 75, 76 and 77 strikes that will expire on Friday. In total, HYG has more than 50% of its option gamma expiring on Friday and anything over 30% is considered to be impacted through expiration.
This is because expiration of HYG options forces the option dealer desks that initially shorted the calls and delta-hedged them with long stock positions to sell the stock.
This is usually done on the day of expiry, so we could see HYG towards the 74 strike, which is the largest absolute gamma strike for HYG.
Notice below how HYG failed at the 200-day moving average yesterday. I initiated a bearish strategy into the Jan. 20 expiry.
Meta Platforms Inc. (Ticker: META)
META is another stock that has built up large call positions as it rallied from below $90 to above $120 since it put in its low on Nov. 4.
I like that it went up and filled the gap above $120 and ended with a bearish candle on a high selling volume day (chart below).
With 34% of META’s gamma expiring I think it could potentially go back down and fill the gap it left below to $116.
I bought a short-term put spread on Meta just looking for the dealer selling their stock hedges to make the difference over the next week.
Bring It Home
After today’s FOMC meeting, expect volatility to come off a bit. It was incredible this week how juiced vol was for CPI and FOMC data.
We may still see some wild swings as liquidity is reduced during the holiday period.
Many times at the end of the year there are some very good deals on offer as tax selling and end-of-year position unwinds occur.
Stay tuned for trade ideas and thoughts on how to position for Q1 2023, which I believe will provide some awesome trading opportunities.
In the meantime …
Live and Trade With Passion My Friend,
Griff