On the trading floor, we’d bet on anything.
We literally had a board where we traded options on life events. We even traded options on people’s lifespans. I lost big on Tom Sosnoff, because I thought that guy would never make it past 65.
When I got married, most of the guys I worked with bet on 5 years. This Saturday, it’s 17.
I saw Tom about three weeks ago, and he said, “You stayed married just to screw me on that bet.” I absolutely did.
Traders will price anything. And every single week, the options market puts a price on how far the S&P 500 is going to move.
Take Its Temperature At 3:17
That price is the expected move, the range the options market is pricing for the S&P 500 (SPX) over a set period. This week, it’s about $165. For today alone, it was about $43.
I take its temperature right after the close. The official close is 3:15 central, and I’ll read it at like 3:17.
As traders close out risk for one day, they roll it forward into the next. So that number is a great measurement of what tomorrow’s action is going to look like, because that volatility is already predetermined.
The Seam In The Risk
We get weeks where the market rides right on the edge of the expected move. Last week, we rode the lower edge, then came into this week and shattered it. The week before that, we rode the upper edge.
The edge is almost like a seam in the risk. On one side, market makers’ hedging tends to calm the market down, and on the other side, it speeds it up.
There’s a ton of traders who want us outside of it and a ton who want us inside of it, so price pulls tightly into the seam. It becomes a little bit of a happy place for the market.
The expected move formula in thinkorswim is the one I use. We ripped it from a Citigroup white paper, I think from 2008 or 2009, changed a couple things and put it in the platform. Now pretty much every trading app has an expected move like it.
I’m a big believer that if the market says we’re moving 43 points, who am I to take the other side of that?
To your success,
Don Kaufman
