On Friday, SPX skew hit 168.
That is one of the highest skew prints we’ve seen in recent history. Skew tracks how much traders are paying to protect themselves against an S&P 500 crash, and a number like that means they were reaching to buy SPX puts.
How do I know it was into the close? The skew calculation is done after the close. So we’re selling off big, and people got caught, if you will, with their pants down.
That sounds like a crash signal. Read it the right way, and it tells you what’s likely to come first this week.
Anybody That Needed To Buy Puts Did It
I’m actually going to tell you something. That’s not necessarily a bearish connotation for markets. On the contrary, I kind of feel it’s a little bit more bullish.
Anybody who needed to buy puts, it looks like they did it. Anybody who needed to buy volatility did it, which is why volatility jumped so much. So trade came into Monday morning well hedged.
It doesn’t mean that we can’t go down. It means I feel like we have to bounce a little bit first. Those traders relinquish those hedges, volatility contracts, and then we come into another round, if you will.
And look, the market is still pricing in about a $165 move in the S&P’s this week. Last week it was $95.
I’m Not Wrong, I’m Just Early
I wouldn’t sit here and tell people to fade a rally on the first day we rally.
If you’re going to short into it, first of all, do it with defined-risk options, where you know the most you can lose before you get in. Secondly, if we rally into the close, you could take a little small, measured shot.
I wouldn’t go full bore, because this rally could easily extend before it fades again, everybody sounds the all clear, and then we tank again.
If I take that shot today, a defined-risk short costs me about a buck, buck 10, and the most I can lose is what I pay.
Take the utilities, the XLU. I faded that bounce, and it kept on ripping.
There are 32 days left on that trade, so I’m not wrong, I’m just a couple of days early. That’s what I keep telling myself.
The Market Is Alive
I’ve said this for years. I am absolutely convinced the market is alive as an entity, and if you don’t treat it that way, it’s going to come after you.
The market as a whole goes as far out of its way as possible to screw each and every one of you individually. Once you get that down, you’re going to be just fine in this business.
To your success,
Don Kaufman
