Hey Traders,
On Wednesday I revealed Strike Force. It’s how I use order flow to inform my decision making when I trade. If I see a large block of call buying on the offer, that might induce me to buy calls under the right circumstances.
That’s not the only way I use order flow, though. A lot of my trading starts with a story or a thesis. Then I use order flow to confirm the idea.
Here’s an example. In early October I went long TLT pretty hard across my accounts. I saw bond auctions starting to improve, the “green shoots” for bonds to find a bottom and likely rally. Then I looked at the tape, and you know what, there were huge blocks of calls trading in IEF and TLT (not to mention options on bond futures).
As you likely know, bond prices have rallied hard in October. The yield on the 10-year note has gone from 5.30% to below 5%. That’s a huge move for such a short period of time, and it happened in the face of two hot inflation prints. TLT went from below 78 to likely breaking 82 ahead of the election.
Here’s a preview of where my head’s at.
I have ideas on what might happen if the Democrats sweep the House and Senate. I know we’re all thinking about AI and data center politics. I don’t think that’s the trade. Think about what Democrats pushed the hardest when they held total power in past administrations.
I think healthcare, and I think “green” energy. We’ve heard some about the former but nothing about the latter. Green energy has taken a huge backseat to oil, gas and nuclear. Nuclear isn’t going anywhere, but what happened to hydrogen and solar? What about the electric car subsidies that have expired?
I think we could see some of the green names heat up, but this isn’t a thesis I want to jump on yet. I need to see demand for options. It doesn’t matter what party you support. I can assure you that Goldman, JPMorgan, Morgan Stanley and all the other huge banks are in the “room where it happens.”
When specific bills get written there will be winners and losers, and we’re going to see big option trades ahead of those. That’s the kind of thing I’ll be walking through live on Wednesday, once we actually know who’s writing the bills.
I call those trades diamonds, because 75 million contracts trade a day, and the diamond is one of maybe a handful of trades anyone would want to make on that specific day.
The option tape is the one thing that can’t hide or mask what the big banks are trying to execute. I’m going to be looking at the names on the priority list of whichever party ends up ahead, seeing if I can find any diamonds via huge block orders.
Your only option,
Mark Sebastian