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September 2, 2020
STOCKS – AMZN
Macro – SPY, QQQ
Mike’s Reading The Markets (RTM) Premium Content – NOW WITH A 2 WEEK FREE TRIAL
- The NASDAQ Just Hit That Level Again – Midday
- Why The VIX And Dollar Are So Important – Morning
- Stocks Continue Higher As We Enter Election Season
- Market In Overdrive, How Much More Upside?
- Technology Continues To Rule – Midday
MICHAEL KRAMER OWNS QQQ PUTS
The past few days have been gut-wrenching, having to deal with the loss of my 13.5-year Golden Retriever. She was the first dog I ever had; the story behind how we got Lexi is too funny not to tell.
Before I had made my move to my buy-side trading position, my wife, then-fiancee, and I visited a local puppy store on Long Island; at this point, we lived in Manhattan. My wife had been begging me for months to get a dog, and I refused. The idea of having a Golden Retriever and living in a 700 Square Foot 1 bedroom apartment on the Upper Eastside seemed like a disaster in the making.
To get my wife to stop going on about the dog, I made her a bet. I told her if I got this new job, we could come back the next week and get the puppy. Of course, I had two outs in this case to avoid the dog; one was not getting the job. The second was that the dog would be gone by the following weekend. Of course, I got the job, and the next weekend, we returned, and the puppy was eagerly awaiting us. So Lexi became the first piece of our family. She brought a lot of great memories to our lives, and will be missed.
Clearly, not easy to let go, but it was, unfortunately, her time.
The time off from watching the market and dealing with life events did give me some time to think about what has been happening in the market. I have not been satisfied with many of the narratives that are floating around the market, from low rates to M2 money supply and equity risk premium. They do not work. But finally, it seems to all come together in a rather fantastic way, and perhaps I wasn’t too far off when I started focusing on gamma exposure in the options market more.
The truth is, at this very moment, I believe the equity is something of a self-fulfilling prophecy. The higher it goes, the more it goes up. My old boss always used to say buyers are higher, and sellers are lower. The chart below shows how call volumes have exploded in recent months, well above historical levels.
(TRADE ALERT)
Now, the more that calls are bought, the more the dealers are short calls. To hedge their positions, dealers need to buy the stock. That pushes the price of the stock up, which, in turn, helps to bring in more call buyers and more hedging. At some point, dealers will get long to much of one stock and perhaps look to diversify that risk across a basket like the NASDAQ 100 or S&P 500. So again, now buying futures of the index sends the entire index higher.
Now I don’t think it started this way, but this what this has become over the past few weeks. So, taking on more risk means higher options pricing, which comes in the form of higher implied volality. We could see that the VIX index has been trending higher in recent days.
The VXN, which is the NASDAQ 100 VIX, is rising even faster.
Implied 30-day volatility levels for the Qs have risen from 23.9% on August 20, to 33.8% on September 2.
(TRADE ALERT)
The IVOL in AMZN has risen from 32.1% on August 17 to 43.4% today. You’d think Amazon’s stock was crashing.
(TRADE ALERT)
So when will the music stop? When the implied volatility levels reach a point that options pricing no longer makes sense and traders stop buying calls. That will cause dealers to have too many long positions on their books, and result in a significant reversal.
The Qs did hit the upper end of the trading range to around $302. It is impossible to know how much higher they go, but you have an RSI over 81 and is at the top of a channel. It should result in some mean reversion.
Right now, the S&P 500 is still on track to hit 3,590. Haven’t thought about what happens next. Again, it is positioned like the Qs.
Anyway, that’s all for today. I haven’t done much the last few days, so I have lots to get caught up on.
-Mike
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
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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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