What a week for the markets. Monday and Friday set us up for potential disaster. We limped into Tuesday thinking things could get very, very, very bad. Then Tuesday brought a glimmer of hope with “Hey, maybe things aren’t that bad.”
Wednesday delivered a big, giant rally with solid follow-through. But what caught me completely off guard was President Trump’s speech Wednesday night. It wasn’t particularly passive, and for the S&P 500 (SPX) to go from down 100 points at the open to closing green on the day was absolutely astounding.
Look at the range SPX had just during trading hours: The low hit 6474, the high reached 6601. That’s a 126-point range in a single session.
Here’s what you need to recognize about SPX right now. The average true range, which measures daily movement between highs and lows, is sitting at over 100 points, almost 105. That’s good for about 1.5 percent a day. Folks, that is massive movement. The last time we saw anything close to that was during the tariff tantrums from about a year ago, and before that, November.
What’s been interesting is this hasn’t been a sudden spike. It’s been a slow cascading increase in movement. My prediction: next week is going to be a banger.
The Nasdaq and VIX Tell the Same Story
Invesco QQQ Trust (QQQ) followed a similar pattern. The Qs are a little weaker than SPX and the Dow, but same story. They came in ugly, with a low below 572 and a high over 586. That’s a 15-point range, almost 3 percent. QQQ is moving about $11.20 a day, almost 2 percent daily.
Every day we’re moving, and again, this cascading increase in movement out of the Qs is really fascinating.
What’s amazing is the CBOE Volatility Index (VIX) managed to close down on the day, still above almost 24, but the VIX looks exceptionally strong. Given Thursday’s turnaround, when I pull up the futures term structure, we’re showing confusion. Futures are in backwardation, and the VIX itself is over all the months except the front two.
The VIX is basically telling you: “You know that huge movement you’re getting on a daily basis? We’re going to keep getting it.”
Oil Explodes, Bonds Find Footing
Oil, on President Trump’s speech, absolutely exploded higher. It’s fascinating that the United States Oil Fund (USO) could hit 138 and SPX would manage to close up green. I did not have that on my bingo card. USO actually closed near the highs of the day.
If you’re looking for a reason to say “Hey, maybe things aren’t so bad,” the bond market seems to have found its footing. If the bond market could start to rally here, even with oil going up the way it is, that’s going to provide a little bit of a floor for stocks and give them some strength.
How I’m Trading This Volatility
Getting back to SPX, the play has been straddles and strangles, day trading, 0DTE, 1DTE. Because we’re getting such wild movements, I put on an out-of-the-money call and an out-of-the-money put on SPX.
On a day like Thursday, when we were down and then managed to get up, I ended up selling both sides at really nice prices. I made over 100 percent on my puts, and by the time I was done with the calls, I was looking at north of 125 percent on a strangle. This is a trade that doesn’t have a directional opinion when it starts.
Those trades continue to work and work very well. That’s part of the reason why you want to be looking at what we’re doing here at Option Pit so closely. We’ve been all over it. In the last week, we have put on strangles and trades that have returned 240 percent. We’ve returned 65 percent, 20 percent, 50 percent. Thursday’s trade hit 125 percent.
One to Buy
Dow Chemical has been on an insane run. It finally gave up some of those gains on Wednesday, but the orderflow and the price action look so strong. I think we could see DOW back at 50 in the coming days.
One to Sell
SMCI: I keep harping on NVDA, but in the end the stock going to zero is Super Microcomputer. The company is going to get charged with fraud and the stock is probably going to zero or, if they are lucky they will find a buyer.
Mark Sebastian