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.
The 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.
AAPL 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 |
IBM 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 |
QQQ 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 |
SPY 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 |
VIX 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.
Trading 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.