The S&P was up 120 points this morning, and I bought puts.
I know. Why would you get bearish on a day like this? I’m not, exactly. “This is not so much bear up as it is putting on an incredibly high risk reward.”
I bought a put spread in the XSP, the mini version of the S&P 500 index, that expires today. I paid about $1.25. “If you do not like parting with $125, don’t do the trade.”
Look at the chart this morning. The bell went off and we went straight up. There was no pullback and nowhere to get in.
That’s not buyers lining up. That’s short covering. Traders caught short have to buy back in, and the market makers on the other side have to buy too. Short cover, short cover, short cover, and the feedback loop keeps running.
That scares me, because once everybody covers, there’s nobody left short. If this thing starts to roll over, “they’re going to have to sell into selling.”
We saw it last Wednesday. We came out of the hole with a magnificent rally after the election, all the shorts got out, and then we got dropped right on top of our head.
The Market Didn’t Trust Itself
The expected move is how far options prices say the market will travel in a set amount of time. When the market rips higher, you’d expect it to shrink.
This morning the S&P opened up 60 with a $54 expected move for the day. Then it ran up another 60 points, and the expected move only dropped to $46. “That’s a problem. The market didn’t even trust itself.”
For the whole week, the SPX expected move is $221. That’s one of the biggest I’ve seen in recent history.
“The rip your face off rally and a rally are basically the exact same animal.” Can this turn into a real rally? Of course. But if there’s a greeting card for volatility, this is it.
Tomorrow Is The Big One
CPI comes out tomorrow morning. Two weeks ago, I’d have told you it didn’t matter.
Then Friday’s jobs number came in hot, and the market did nothing with it. That’s why tomorrow matters. If the CPI comes in hot, you’re in trouble.
Wednesday is Veterans Day too. The bond market is closed and the stock market is open, so you can get some funky moves.
Quite frankly, they should close the whole thing. You got shot at for the country. Close the damn market for a day.
Keep your hands and feet inside the vehicle this week.
Size It Before You Need It
You won’t catch the highs or the lows this week. What you can do is know exactly what you’re risking before the CPI hits, the way I did with that put spread.
Everything I use to read the expected move and size a trade around it is in my volatility training, with lessons from the rest of the TheoTrade team.
To your success,
Don Kaufman
P.S. I also put on a butterfly this morning that pays off if the S&P falls under about 7,200 by Friday. It cost me 45 cents, for a 40-point-wide fly. Is it crazy? Maybe. But with a $221 expected move this week, I’ll take that shot. See how I build trades like it.
