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The Signs are Glaring – Seriously!

Let me start by saying I am in no way diminishing or discounting the tragedy in the Ukraine nor the escalation of military action by Israel’s launching of a ground offensive operation into Gaza. My own personal feelings on either of these events are strong and I am more than willing to share them, but within a different forum.  The purpose of this post within www.logicalsignals.com is to present my interpretation of activity within the financial markets and on that basis I reiterate the signs are now glaring and to ignore them may be more costly than what many are expecting.

WarningSignsThe warning signs have been present for sometime now.  I’ll grant you not as glaring as what I saw today but nonetheless present and blinking red.  The volatility indexes have been pushed to contract lows and nearly historic lows in the VIX, VXX, and UVXY.  The broader indexes and in turn their component companies have been held at extreme overbought levels.  Selling puts has become an asset class and marketed as such to the unsuspecting as a sure fire, low risk path to additional income.  To me any money manager that bought stocks at current overbought levels, sold volatility at current oversold levels, and added short puts to increase alpha, beta or theta to their portfolio received an early wake up call on Thursday.  I wonder how many actually answered the call?  When the masses come flooding back in to try and cover their positions which might include selling stocks, buying volatility, and buying back short puts there may be an additional very rude awakening when they can’t get out of or cover their positions as the buyers of equities run for the exits and the sellers of volatility don’t answer their phones.

Friday is July expiration and unless the markets retake the lost ground given up on Thursday, expect things to get ugly fast.  Here is what could be considered a preview of where those points of “ugly” may occur within a few of the titans and indexes covered and traded.  Take a look at the tables below where I note as of the close today options volume and open interest in the ATM (at-the-money) July call and put options for AAPL, IBM, QQQ, SPY, and VIX.

applelogoAAPL the strikes are skewed due to the 7:1 stock split.  As of Thursday’s close $93.09 it appears that the line in the sand for Friday is between the 92 to 94 levels.  The July 100 calls have an open interest of 195,985 and closed offered at 0.01.  The July 100 puts have an open interest of 99,454 and closed at 6.87 (mid point).

 

CALLS                                                                                     PUTS

Volume Open Interest Strike Volume Open Interest
11,781 24,765 92.14 42,330 24,105
41,333 47,082 92.86 29,834 37,202
52,955 31,922 93.57 36,355 23,965
61,292 7,540 94 28,452 12,725
78,063 61,129 95 37,979 37,876
         

 

 

ibmlogoIBM reported on Thursday and from the options close the consensus would have been for a positive outcome.  The initial reaction from the stock was a quick run to $197.50 before finishing the session at $189.05.  I suspect there will be a volatility uptick in the July options as traders look to roll positions out under “duress” conditions.

 

                        CALLS                                                                       PUTS

Volume Open Interest Strike Volume Open Interest
2446 8332 190 8493 5104
4137 1691 192.5 5227 2466
10,520 12,492 195 3833 1468
7316 1426 197.5 1090 53
16,652 6,887 200 1163 2050

 

qqqlogoQQQ traders may have been caught by surprise when looking at the open interest numbers – particularly in the puts where a continues slump is likely to drop the QQQ’s below 94 which will put into play the 94 puts.  Look for volatility to uptick here as well.

 

            CALLS                                                                       PUTS

Volume Open Interest Strike Volume Open Interest
2,756 79,051 94 29,911 42,579
7690 6164 94.5 31,945 13,720
26,677 43,308 95 38,325 39,542
16,994 6,838 95.5 31,984 13,720
28,137 97,725 96 20,736 25,445

 

spdrlogoSPY the July 196 puts show a net of 25,741 new buyers on Thursday with the July 197 puts total being 28,590.  Friday’s expiration should continue that trend if this ETF drops an additional 2+ dollars.

 

                        CALLS                                                                       PUTS

Volume Open Interest Strike Volume Open Interest
1063 27,772 192 53,576 175,968
953 25,659 193 26,426 121,321
1412 47,253 194 58,345 158,197
8842 64,374 195 113,890 192,429
53,746 122,321 196 159,030 133,289
77,5789 88,864 197 123,258 94,668

 

cboevolindexVIX climbed $3.54 to close at 14.54 on Thursday.  The index moved 4% higher than the future, which added $0.35 to close at 14.  This index is providing more of a double whammy for Friday’s expiration, as traders appear to be short calls above 13 and short the puts below 13.  If volatility continues to surge higher, as I suspect it will, there may be additional short covering under “duress” type situation where volatility could spike a particular series.

 

CALLS                                                                           PUTS

Volume Open Interest Strike Volume Open Interest
14,843 38,107 12 57,683 81,427
10,261 12,675 12.5 6565 52,590
41,768 118,752 13 25,729 158,988
73,306 170,634 14 10,422 86,648
72,964 212,645 15 4227 90,605
41,255 203,805 16 1985 111,504
40,121 118,594 17 1817 52,947

 

 

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

 

Three-keysTrading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

 

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.


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