In support of the bear case; options trades show what Street is thinking

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mts marketrecap 330 300x207 In support of the bear case; options trades show what Street is thinking

In support of the bear case; options trades show what Street is thinking

Collective Intelligence!

There are at least two sides to most stories and the record-setting run in the S&P 500 and the Dow Jones Industrial Average are no different – as they continue to stretch the limits of gravity … If we speak only to the bulls, the bears in the market feel at a loss. So, in fairness we try to make the most of what we are given. Following the trend is generally a winning trade strategy and with that in mind – we may or may not agree, but that’s what makes a market. So, we present … Federal Reserve Analog:  Fed leadership change has negative impact. Since the Federal Reserve was created in 1913, we have had 13 Fed chairmen. In the first six months following a new appointment, the [DJIA] (the S&P 500 wasn’t around until 1929) has always had at least a 7% correction, with the largest being 33% (the 1987 crash). The average drawdown has been 16%, with a 12% median. These are significant numbers considering how minimal and infrequent the corrections have been the past several years. (Source:  MS Wealth Management, CIO Mike Wilson).

Thursday saw a day of rest as well as a hold, at 1795.50 – 10 handles below Wednesday’s Fed-induced 44-handle rally to 1806. Following today’s 2.5-handle gap higher open at 1804.30 – 1805.00, the index held above Thursday’s high – while also marking today’s intraday low before retesting and converting the previous all-time highs to afternoon support as the clouds of uncertainty have been blown out. The Globex session saw 203k ESH traded in a range of 1806.75 – 1802.50. Thursday’s SPH regular trading hours (RTH’s), pit session trading range was 1804.80 – 1795.50 before settling at 1802.10, down 2.6  handles. Europe opened strong and faded back modestly as traders anticipated higher volatility along with increased U.S. volumes due to the rebalance & the expiration at day’s end. Also, the GDP checked in at 4.1% versus estimates of 3.6%, while GDP price index matched 2.0% expectations.

OPTION ALERT (09:48) [VIX] – Early volume in VIX options includes call spreads. The index is down .90 to 13.25 and now well (20.5%) below the multi-month highs of 16.67 seen Wednesday before the FOMC announcement. In options trading today, an investor was selling 28,000 Feb 22 calls on VIX at 59 cents to buy 33,600 Mar 26 calls for 60 cents. The activity in March is opening and the Feb 22s might close from 11/27 when 30,000 were bought for 82 cents each. Also today, a Jan 17 – Feb 30 call spread trades on VIX for 21 cents, 10,000X, and is possibly rolling of a position as well. (Fred Ruffy (Trade Alert LLC)) [$13.21 -0.94 Fwd].

DUNN (09:53) Significant [SPX] index reweight on today’s cash close with [FB] entering the index, equivalent to -113,725 ESH4 for sale. Expect more noise than usual as we head into today’s close. The VIX, fear gauge, traded a morning low of 13.12 — +.20 higher than yesterday’s low … before grinding higher.

matt (12:08) Although the ‘Taper’ was small it was still the first step, the closest we’ve been to the Fed tightening since the zero rate policy took effect, hence the curve flattening. The Blues (EDH7-EDZ7) have sold off 50 basis points from the high since Thanksgiving. The street is setting up for higher rates via the options market today. Many Hedge Funds were pretty flat going into the FOMC and are now stepping in the market. Selling Green February and Green March Call spreads to finance buying put spreads. 30k of the Feb and 50k of the March expiry. EDH6=9866. The trepidation in the market is the 3% yield in the 10yr UST. I strongly believe we will trade above 3% 1st Q and then it will move quickly to at least 3.25%. (See  for details.)

OPTION ALERT: [XLF]Players position for more gains in the Financials. XLF is up 14 cents to $21.62 and Jan 22 calls on the ETF are today’s second most actively traded options contract (behind SPY Dec 182 calls). Nearly 80,000 Jan 22 calls now traded in the financial ETF, including a buyer of 25,000 contracts for 19 cents each. Separately, one player sold the Jan 21 – 22 call spread on XLF at 54 cents, 10000X, and is possibly rolling a position to the 22-strike from the in-the-money Jan 21s. The interest comes four weeks before the Jan expiration and as XLF tests its November multi-year highs of $21.64. The flow seems to be expressing confidence that the financials can continue to move higher through year-end and into early-2014. (Fred Ruffy (Trade Alert LLC)) [$21.62 +0.14 Ref, IV=14.6% -0.7].

iceChat (13:20)  Early look; MOC buy $1.2bil. 3 -Way Flow Ahead / MOCs to buy/sell / Re-balance Big To buy/sell and Dec Quarterly Expiration coming up. HITMAN (13:39) 1818 LOOKS LIKE A BRICK WALL /  TOO MUCH OPEN INTEREST THERE.  By 2:00 the VIX had backed off of the intraday high of 13.62 and was sitting just below 13.50 area while the SPH was trading 1817 area when (14:00) MrTopStep MiM Closing Imbalance was showing a small 64%, $651M to the buy side. By (14:20) the MiM had FLIPPED to a large 61%, $837M to SELL as the VIX traded a new high of 13.70 and the index slipped to 1814 area. At (14:40) when the MiM mushroomed to 61%, a very large $927M to sell then at (14:47) $1.4B for SALE MOC – as the index held 1814 area and then the previous all-time high 1812.50 area before bouncing. On the cash close the March futures traded 1813.70 area before settling at 1814.50, up 12.4 handles on the day.

Coming events:

Algae to crude oil: Million-year natural process takes minutes in the lab

Put your coffee down b4 opening … One long sentence by a physician that injects humor about the Affordable Care Act      *The lie of the year, according to Politifact  - Charles Krauthammer is an American Pulitzer Prize-winning syndicated columnist, political commentator, and physician. His weekly column is syndicated to more than 400 newspapers worldwide.     *The Case That Could Topple Obamacare … legal worries were meant to end after the Supreme Court upheld the individual mandate, the heart of the Affordable Care Act.

Posted here since Wednesday: US Equity Option Expiration: Per Jeffries there is a VERY large short gamma position above SPX 1800. The Friday, Dec 21st 1785 straddles is 1.5% highlighting the market is not expecting a large move higher to materialize following the FOMC meeting. The most acute pressure point is above 1825. Between Dec regular and year-end expiries there’s $118 billion in net calls open between 1800 and 1850 strikes ($77bln for Dec regular expiry).  *Also, remember this from the FOMC statement: “However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. ” Also: “The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”  *This was noteworthy as well … “the Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”


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