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Stocks finished the week higher as implied volatility was crushed. I did not expect that at all. Realized volatility levels have remained above 20, and my thought process was that we would see the VIX stay elevated. Instead, the VIX continued to move lower.
There are many benefits to working for yourself. Among them are flexibility in your schedule and, more importantly, the freedom to be creative. However, one downside is that it’s impossible to remember everything. Over the past two weeks, I underestimated the decay of puts as stock prices rose. As prices increased, put premiums burned off, causing puts to be closed. Closing puts led implied volatility (IV) to fall, prompting even more puts to close. This created a dual effect: market makers covered hedges, pushing markets higher, and implied volatility declined, helping to further decay put premiums.
As the chart from Optionscharts.io shows, there are no more net put deltas on the board. This doesn’t mean all puts have been closed, but it indicates that all delta positioning is now positive—an oversight on my part. But even Ted Williams, arguably the greatest pure hitter in baseball history, made an out 60% of the time.
With that said, could the market move higher? Anything is possible. However, considering that the options market dynamics are now better balanced, along with other indicators I’ve been monitoring and the technical outlook, the market remains in an area ideal for a potential top—something I pointed out on Thursday. Technically, a 1.5% rally doesn’t significantly alter this view. We are still near the 61.8% retracement level, and retracement levels are rarely exact.
Also, BTIC S&P 500 Total Return Futures is not confirming this upward move; they made a cycle low on Thursday. In 2022, rallies in the S&P 500 occurred without a rise in leverage cost, and those rallies faded. In contrast, during 2023 and 2024, the leverage cost consistently rose alongside the S&P 500. Currently, the cost of leverage is declining, resembling the pattern observed in 2022 more closely.
After initially moving higher, the JPY 5-year Cross Currency Basis Swap Spread is now turning lower. The key question is whether it will continue downward, and that answer is more complex. However, for now at least, this suggests the rally is likely nearing a turning point.
It appears debatable whether or not CTAs have been active in this rally. Some say they are active, while others suggest they are not. They may be active, as the 20-day moving average appears to be turning upward, and the spread between the 120-day and 20-day moving averages is also rising. Additionally, we’ve seen some sizable market-on-close imbalances, which further indicates possible CTA activity. It could be bullish if they are buyers.
Anyway, have a good Sunday.
Mike
Terms By ChatGPT
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Implied Volatility (IV)
A metric reflecting the market’s expectation of future volatility, derived from option prices.
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Realized Volatility
Historical volatility measured by the actual price movements of an asset over a specified time frame.
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Put Decay (Time Decay of Options)
The reduction in an option’s value as time passes, assuming all else remains constant.
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Delta Positioning
A measure indicating the sensitivity of an option’s price to movements in the underlying asset.
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61.8% Retracement Level (Fibonacci Retracement)
A technical analysis level used to predict potential reversal points, based on the Fibonacci sequence.
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BTIC (Basis Trade at Index Close) S&P 500 Total Return Futures
Futures contracts settled based on the closing index values, incorporating dividends and financing costs.
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Cost of Leverage
The expense associated with borrowing funds or using financial instruments to amplify investment positions.
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JPY 5-year Cross Currency Basis Swap Spread
The cost difference between borrowing in Japanese yen and U.S. dollars for a 5-year term, reflecting liquidity and credit conditions.
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CTA (Commodity Trading Advisor)
An investment manager or fund that uses quantitative strategies, often based on technical indicators and trend-following approaches.
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20-Day and 120-Day Moving Averages
Indicators that smooth out price data by calculating the average price over the specified periods, commonly used in trend analysis.
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Market-on-Close (MOC) Imbalance
An indication of excess buying or selling demand near the market close, often influencing end-of-day price movements.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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