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Storms are Brewing: Is your Portfolio Weatherproof? Risk strikes when least expected. Optimism peaks before a downturn strikes. Chart below shows remarkable spike in articles mentioning soft-landing before recession hits. Human brain is engineered to think linearly. Anything non-linear tricks the mind. Recession is non-linear which muddles up investor estimates of recession, its timing and impact. Count of Soft-landing Articles & US Recession (Source: Bloomberg ) The US Federal Reserve in its fight against inflation has lifted rates by an unprecedented 525 basis points since the start of 2022. Yet the American economy, US corporations, and the US consumer are remarkably resilient. Non-Farm Payrolls last week came strong. When the Fed is tightening its levers to slow the economy, nothing seems to stop its rise. What explains this anomaly? Three words. Monetary Policy Transmission. Monetary policy transmission takes time, lulling many to believe that consumers and corporates are resilient. When in fact, they are yet to face the consequence of constrained credit markets which will manifest itself in myriad ways from reduced availability of financing, high cost of funding, and rising bankruptcies, just to name a few. This paper is set in two parts. First part describes monetary policy transmission. Part two dives into storms forming in the horizon. The paper concludes with a hypothetical trade set-up using CME Micro S&P 500 Options to defend portfolios from deepening polycrisis. Despite the risk narratives, a soft landing may still be possible. However, the combined impact of Fed’s hawkish stance, rising geopolitical tensions, continuing auto workers strike, tightening of financial conditions, and elevated oil prices & yields renders the likelihood of a soft landing, super slim. Narratives around the soft-landing aside, CTAs have dumped nearly USD 40 billion worth of S&P 500 futures positions marking the fastest unwind on record over the last two weeks as reported by Goldman Sachs. PART 1: MONETARY POLICY TRANSMISSION Monetary policy operates with long and unpredictable lags. Monetary Policy Transmission is the process through which a Central Bank’s decisions impact the economy and the price levels. The flow chart below schematically describes the downstream impact of quantitative tightening. Monetary Policy Transmission Takes Time (Source: ECB ) Changes made to official interest rates affect markets in diverse ways and at distinct stages. Central bank's interest rate decisions impact the markets in the following seven ways: 1. Banks and Money Markets: Rate changes directly affect money-market rates and, indirectly, lending and deposit rates. 2. Expectations: Expectations of future rate changes influence medium and long-term interest rates. Monetary policy guides expectations of future inflation. 3. Asset Prices: Financing conditions and market expectations triggered by monetary policy cause adjustments in asset prices and the FX rates. 4. Savings & investment decisions : Rate changes affect saving and investment decisions of households and firms. 5. Credit Supply: Higher rates increase the risk of borrower default. Banks scale back on lending to households and firms. This may also reduce consumption and investment. 6. Aggregate demand & prices: Changes in consumption and investment will change the level of domestic demand for goods and services relative to domestic supply. 7. Supply of bank loans: Changes in policy rates affect banks’ marginal cost for obtaining external finance differently, depending on the level of a bank’s own resources/capital. The mechanism is characterized by long, variable, and indefinite time lags. As a result, it is difficult to predict the precise timing of monetary policy actions on economy and inflation. For some sectors, monetary policy transmission can take as long as 18 to 24 months. In other words, the full force of the Fed’s 525 basis points spike since 2022 will not be felt until early 2024. Added to that, the Fed may not be done hiking yet. Probabilities of Rate Anticipation in Prospective Fed Meetings (Source: CME FedWatch Tool ) PART 2: STORMS ARE FORMING Not one but three major storms are brewing in parallel, namely (1) Worsening Geo-politics, (2) US Sovereign Risk Fears, and (3) Tightening Financial Conditions. One or more of them could unleash havoc, sending financial markets into a tailspin. 1. WORSENING GEO-POLITICS Adding to the geopolitical conflict between Russia and Ukraine, Hamas attack on Israel over the weekend has elevated geo-political tensions. If counter strikes escalate to a wider region impacting Strait of Hormuz, then oil prices could spiral up sharply, sending shocks across financial markets. Oil prices lost steam last week. That doesn’t guarantee lower prices. Eerily, this month marks 50-year anniversary of oil emergency in 1973 which led to oil prices spiking 3x back then. The US Strategic Petroleum Reserves are at a 40-year low. The reserves are at 17-days of consumption compared to an average of 34-days consumption observed over the last thirty years. 2. US SOVEREIGN RISK FEARS: The US government is facing multiple challenges of its own. The government narrowly avoided a shutdown and has kicked the problem can down the road only by six weeks. Long before investors take relief, the shutdown fear will resurface again. Add to that is the rising US debt levels. With a debt burden of USD 33 trillion, the government debt is forecasted to reach USD 52 trillion by 2033. With rates remaining elevated, a substantial chunk of US Government debt will be directed towards interest payments. Is there a risk of US debt default? To compensate for that risk, bond yields are climbing. The 10-Year treasury yields rose to 16-year high of 4.6%. With jobs market remaining solid, the data-driven Fed might have to keep the rates higher for longer. The futures market implies a probability of 42% for a rate hike during the Fed’s December meeting. Any further hikes can tip the recovering housing market back into crisis due to exorbitant mortgage rates. High yields also cost it dearly for firms to borrow. 3. TIGHTENING FINANCIAL CONDITIONS: Dwindling liquid assets, resumption of student loan repayments, stringent lending practices atop heavy debt burden on US Corporates are collectively weighing down on investor sentiments. Student Loan Repayments: After 3.5 years of loan servicing holidays, millions of students will resume student loan repayments. Bloomberg estimates that these repayments can shave 0.2% to 0.3% off US GDP. Depleted Savings: Strength of the US Consumers will be put to stress tests. Extra savings from pandemic stimulus checks have been depleted to below pre-pandemic levels for low-income categories. Consumer strength could turn into weakness in the coming weeks. Inflation Adjusted Liquid Asset Holdings by Income Group (Source: US Fed and Bloomberg Calculations ) Stringent Lending Standards: The Fed’s Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices points to 50% of the banks imposing stringent criteria for commercial & industrial loans. Lending conditions are at levels last seen during 2008 global financial crisis. Impact of this will be felt in Q4 when business will be stifled from access to funds. Tightening Standards of Commercial & Industrial Loans (Source: July 2023 SLOOS Survey ) Corporate Debt Burden: Years of extremely low cost of funding have tempted US corporates into a debt binge. With rates rising, the debt burden is getting heavier on corporate balance sheets, cash flows, and profitability as reported by Bloomberg. Leverage ratios are rising. Interest coverage ratios are falling. Average Free Cash Flow to Debt ratios are plunging. Debt burden amid rising rate environment is hurting US Blue Chips (Source: Bloomberg Intelligence ) HYPOTHETICAL TRADE SETUP Against the backdrop of these risks, this paper posits a hypothetical back spread with puts to gain from sharp index moves. Unlike a long straddle, this option strategy delivers (a) outsized gains when markets plunge, and (b) limited downside risk if market remains flat or rises despite the risks. This strategy involves selling one unit of at-the-money puts to finance purchase of two units of out-of-the-money puts. This strategy can be executed either for net positive premium or net negative premium depending on the choice of strikes. Specifically, the hypothetical trade illustration is built around CME Micro Monthly S&P 500 Options expiring on 29th December 2023 (EXZ3). The strategy involves (a) selling 1 lot of EXZ3 at a strike of 4400 collecting a premium of USD 655 (131.16 index points x 1 lot x USD 5/index point), and (b) buying 2 lots of EXZ3 at a strike of 4300 paying a premium of USD 950 (95.041 index points x 2 lots x USD 5/index point). The hypothetical trade involves a net debit of USD 295 (58.922 index points * USD 5/index point). This trade breaks even when S&P 500 (a) falls below 4141, or (b) rises above 4400. Pay-off from Back Spread with Puts Trade Strategy (Source: CME QuikStrike ) Summary pay-off from this trading strategy is illustrated in the table below. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
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CME_MINI:MES1!Short
by mintdotfinance
18
Idea History of the JHEQX Hedged Equity FundIf you’re new to my TV feed, I have been following 3 JPM hedged equity funds put spread collars (seagull) for 2 years now. Some points to be aware of before using any of this info: Theories are highly speculative dealer flows. All the information is public. Hedges are SPX quarterly expiry options. Core concepts originate from Cem Karsan on fin twit. I use the white paper “Implied Order Book” as my basis for Dealer Flow My Charting on the funds started in 2021 when I was trying to understand the role of volatility and the expiry of these funds before and after Opec/VolEx. I got my first prediction completely wrong. Then I began to map the history of the expirations My interest in the funds led me to 2 other similar funds running the same strategy. I started breaking down the delta and gamma of the hedges The math is fairly straight forward. So I started a pine script to track the collar The script involves plotting the delta/gamma/vanna for a put spread collar I had transformed into “The Hedge Whisperer” Pointing to my price targets like Smalls on the Sand Lot. But I realized I was getting lucky, and started to look for the distribution probabilities of the hedge The popularity of 0DTE continues to grow and the understanding of these dealer flows became an event of their own. In the coming weeks: Regular updates on hedged equity flows and levels. How I think JHEQX will be the straw that breaks the camels back. Trade ideas for upcoming expirations. And How to hedge assets using the same strategy Thanks to all who have commented and kept my interest in writing and researching. I hope you find these topics helpful.
SP:SPX
by SPYvsGME
2
Script to track put collar spreadsFor all you weekend script warriors out there. I'm working on a new script to track the greeks for put spread collars like JHEQX My thought is to publish a script that can automate tracking of these massive collars and generate greeks, strikes and future volatility predictions. I want to create trading strategies based on selling while negative gamma and buying while positive gamma I have Black Scholes and implied volatility working close to my reflect my brokers. I will publish the completed script when I get iv working properly. There needs to be some public light shed on these strategies. Why? These strategies will continue to drain all liquidity from the markets until there is a liquidity crisis. You're Crazy. No Really, Why? Let me break it down... This strategy is 1 of 3 by a single prime broker. My guess is there are a lot of other big hedge funds doing a very similar strategy. Every 3 months, the strategy is reset. Every 3 months, a big liquidity withdrawal is being made without anyone even noticing. Market liquidity pays for the premium of this strategy. O'Rly? This strategy is insurance for 20 billion in assets. The premium for the long put contracts on 20% downside for 20 billion is ~550 million dollars. The problem. ~550 million in credit sold by market makers (dealers) with no intent of taking on the risk. Market above the short call, it's absorbing QE. Market below long put, 10-20% draw down in S&P 500 To see the results of this, compare what happens when the strategy resets during QE and QT. Imagine for a moment the trillions in margin and equities being used to draw income, yield and premiums from markets. IMHO, this strategy is the Credit Default Swap of 2020s The fed has no choice now except to continue raising rates with relentless QT to reduce its balance sheet. This bubble may be so big, your children's kids will be paying for it. I need to call my mom.
SP:SPX
by SPYvsGME
17
Put Spread Collar (Seagull) on JHQTXThe collar resets the last business day of Feb, May, Aug, and Nov. This is the smallest of the 3 funds JPMorgan manages with a collar. At 3 billion in assets, the impacts on markets are still relevant. The options for the 3rd fund are not as well known, but using the reset date and the fact they use SPX options I’m able to make a guess at the relevant sizes and strikes using current open interest. Sell 7000 x SPX Aug 31 - 4350C - $90.50 for $633,500C Sell 7000 x SPX Aug 31 - 3300P - $31 for $217,000C Buy 7000 x SPX Aug 31 - 3900P - $120.88 for $846,160D Total cost of spread ~0 net I don’t have access to options history to find the previous quarters values except to use how the current quarters are collared, I’m able to take a guess based on date and close price to find relevant strikes. The idea behind the fund using this strategy is not to have to pay for put premium, instead they sacrifice asset profits above 5.5% when the options reset. The current unrealized gain is $1,967,000. Most of which will be eaten up by theta the next week while staying between the short call and long put (white zone). When EOM rolls over I’ll have a better opportunity to see the options transition the day of. The Dealers selling these strategies remain delta neutral so you can speculate that dealers will buy SPX delta back below the 3900P and Sell SPX the higher above 4350C. This is only 1 strategy of PUT/CALL Hedging and there are millions of other open contracts by hedge funds to limit risk but cap potential profits. Key takeaway All these hedges keep the market pinned to a certain set of outcomes. What we're seeing now with all the big swings up and down in the market are the result of lower liquidity. As funds compete for handles on the market we're seeing more frequent up/down moves. 2 reasons why we moved from 4200 range so quickly is: 1) Window of weakness from dealer flows around OPEX 2) A bigger fund like JHEQX (see chart link below) dealer will need to sell as September approaches. If this strategy interests you, I’ve been writing about it for almost a year. @SPYvsGME for chart updates and I’ll post a link to an options strategy calculator with the strikes.
SP:SPX
by SPYvsGME
8
$STZ — Diagonal Calendar Put Spread?This price forecast is purely based on technical analysis of the current setup. I guess people are drinking a lot? We've had an extremely long stretch of green - which is a stale green light - 11 days in a row of green & 6 weeks straight of green - that hasn't happened since 2017 - it looks like the stock is trying to breakout on the weekly chart, but it looks so overbought technically speaking - very wide divergence from the all of the moving averages. This is a great candidate for a diagonal calendar put spread , or just naked put buys. I'm considering buying a very far out put - possibly January 2023 - and selling near-month puts against it with the goal of both having my bought put appreciate in value and have the sold near-month puts degrade in value so I can either buy them back for cheap or let them expire worthless. If I am able to successfully roll in near-month credits against my bought strike then I can slowly pay off the position's debit & eventually have a risk-free position. In other words, if I make enough money from selling puts - against the bought out of the money & far dated puts - then I can completely pay off the cost of the puts I bought while still owning them - creates a risk free position. Let me know if this is a confusing strategy for any of you, or if you disagree with my analysis.
NYSE:STZShort
by OptionsAddicts
$AFRM offering up option playsAffirm Holdings $AFRM was up 34% on better than expected earnings and guidance.. the AFRM options market is lively with a steep volatility smile.. depending on your view there’s a number of plays here.. ATM straddle as IV’s there are well below historical volatility.. or bullish call or put spread to sell some rich OTM calls or puts.. after big earnings surprises and moves it can takes the options market a few days to figure out new volatility and therein lies the opportunity..
NASDAQ:AFRM
by Click-Capital
$SPY BULL short put spread 90% PoP, 20% profit #options #option After a beartrap switched back to bullish view with large ETF-s. First of all: SPY Max profit: $204 Probability for 50% of Profit: %90 Profit Target relative to my Buying Power: 20% Req. Buy Power: $996 (max loss without management before expiry, no way to let this happen!) Expiry: 22 days Buy 3 SPY Jul16' 420 Put Sell 3 SPY Jul16' 416 Put Credit Put spread for 0.68cr each. Stop/my risk management : Closing immediately if daily candle is closing BELOW the box, max loss in my calculations in this case could be 350$. Take profit strategy: 65% of max.profit in this case with auto sell order at 0.24db. Of course I'll not wait until expiry in any case! If you liked this article, check my other ideas. Anyway: HIT THE LIKE BUTTON BELOW , and for fresh option ideas FOLLOW ME( @mrAnonymCrypto ) on tradingview !
AMEX:SPYLong
by TanukiTrade
COINBASE 72% PoP 30% Profit with short put vertical strategy TA at 1HR TF (because this stock is new, no daily history) Quick Coinbase play at high IVR, reasons: - trend changed: higher high , lower lows - divergence at bottom - my strike is last bottom as support- $260 - I have very plenty safety zone - Buying power arrieved as volume Max profit: $220 Probability of Profit: 72% Profit Target relative to my Buying Power: 28% Max loss with my risk management: ~$290 Req. Buy Power: $780 (max loss without management before expiry, no way to let this happen!) Tasty IVR: 93 (ultra high) Expiry: 38 days Buy 1 COIN Jun18' 250 Put Sell 1 COIN Jun18' 260 Put Credit Put spread for 2.2cr, because IVR is very high. Stop/my risk management : Closing immediately if daily candle is closing BELOW the box, max loss in my calculations in this case could be 290$. Probability of loss in this way: ~10% . Take profit strategy: 65% of max.profit in this case with auto sell order at 0.77db. Probability of profit this way: ~90%. Of course I'll not wait until expiry in any case! If you liked this article, check my other ideas. Anyway: HIT THE LIKE BUTTON BELOW , and for fresh option ideas FOLLOW ME( @mrAnonymCrypto ) on tradingview !
NASDAQ:COINLong
by TanukiTrade
EEM 62% PoP for quick 18% profit spreadQuick option spread play for the next 2 weeks: * 1 year trendline still holding * bullish trend Max profit: $154 Probability of Profit: 62% Profit Target relative to my Buying Power: 18% Max loss with my risk management: ~$150 Req. Buy Power: $846 (max loss without management at expiry, no way to let this happen!) Tasty IVR: 12 Expiry: 13 days Sell 2 EEM May21' 55 Put Buy 2 EEM May21' 50 Put Credit Put spread for 0.77cr each, because IVR is average Stop/my risk management : Closing immediately if daily candle is closing BELOW the box, max loss in my calculations in this case could be 150$. Probability of loss in this way: ~20% . Take profit strategy: 65% of max.profit in this case with auto sell order at 0.27db. Probability of profit this way: ~80%. Of course I'll not wait until expiry in any case! If you liked this article, check my other ideas. Anyway: HIT THE LIKE BUTTON BELOW , and for fresh option ideas FOLLOW ME( @mrAnonymCrypto ) on tradingview !
AMEX:EEMLong
by TanukiTrade
GSX short put vertical for high creditSmooth RSI is extreme oversold, and the IVR is ultra high. Obvious bounceback play. Max profit: $240 Probability of Profit: 57% Profit Target relative to my Buying Power: 47% Max loss with my risk management: ~$200 Req. Buy Power: $510 (max loss without management at expiry, no way to let this happen!) Tasty IVR: 88 (ultra high) Expiry: 35 days Buy 3 GSX May21' 17.5 Put Sell 3 GSX May21' 20 Put Credit Put spread for 0.8cr each, because IVR is extreme high. Stop/my risk management : Closing immediately if daily candle is closing BELOW the box, max loss in my calculations in this case could be 200$. Probability of loss in this way: ~25% . Take profit strategy: 65% of max.profit in this case with auto sell order at 0.28db. Probability of profit this way: ~75%. Of course I'll not wait until expiry in any case! If you liked this article, check my other ideas. Anyway: HIT THE LIKE BUTTON BELOW , and for fresh option ideas FOLLOW ME( @mrAnonymCrypto ) on tradingview !
GLong
by TanukiTrade
CLX crosses below 100 day EMAClorox NYSE:CLX has really been selling off this month. The stock has dipped below its 100 day exponential moving average more than twice recently. I am going to see if CLX break below the 200 EMA. If so, then the key levels to watch might be that bearish turning point line, which was drawn using previous support levels. Seeing this chart makes me wonder...Is the Coronovirus trade over? As the economy slowly starts to re-open, and talk about the Coronavirus fades into "yesterday's news," can we expect to see a selloff in other stocks that may have benefited from the pandemic? I certainly think so. As the month of November nears, you can expect to hear less about the Coronavirus and more about the upcoming U.S. Presidential election. Hang on to your shorts folks ... its about to get interesting.
NYSE:CLXShort
by UnknownUnicorn6775423
Options Idea: Sell The Sep 18 2020 WFC 22.5-20 Put Spread @ 0.34WFC is in a long-term downtrend, but wants to reverse course. There is a resistance around the $24 area that has held except in mid May when WFC made its 52-week low at $22 and then bounced quickly back the next day to close at $24. I'm going to sell a Bullish Put Spread at the 22.50-20.00 strikes. Since we are in a downtrend I'm going to play it safe and I'm not going to sell naked just in case WFC wants to make a new 52-week low during the next two months. This is a negative probability trade (expected loss > expected win), so it may not be for everyone. 20-WFC-01 Opening Date: July 29, 2020 Expiration Date: September 18, 2020 DTE: 51 IV: 44.94% IV Percentile: 59% Odds of Winning: 73.74% Odds of Max Loss: 12.38% Win: > 22.16 @ Expiration Loss: < 22.16 @ Expiration Reg-T Margin: $250 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we keep 100% of our initial credit. The size of the green area is the size of credit (our maximum win). Yellow Area: Danger Zone: We still win, but we have to give back some of the initial credit taken in. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
NYSE:WFCLong
by OptionsCoach
Trading Edge 2020 Portfolio -Trade #4- GLD - Put Debit SpreadTicker: GLD Position: - 21st Feb 2020 Put debit spread - Long $150 strike Put - delta 0.90 - cost = $3.65 - Short $148 strike Put - delta 0.70 - credit = $2.04 - Net cost/ spread = $1.61 - Running 5x spreads (5x of both strikes) Net cost = $805 Profit target/ break even/ exit: - Max profit of the spread at expiry = cost of the spread minus the width of the spread = $1.61 - $2.00 = $0.39 (24% of cost of spread) - If GLD remains under the short leg of the spread ($148) by expiry (21st Feb 2020) then the spread will have achieved maximum profit - Break even for the spread at expiry is the long strike minus the cost of the spread ($150 - $1.61) = $148.39 (white line) - Exit if GLD closes just above the break even point ($149/ Purple line) - Can also exit the spread earlier if 80% of maximum profit is realized = 0.39 (max profit) x 0.8 = 0.312 + 1.61 (cost of the spread) = $1.92 (more conservative exit price for the spread) Rationale: - GLD appears to be stalling around the $148- $150 range - Stocks are still a little too extended for me to look at longs, however i realize that higher equities are on the cards for the next week or so, this is a more conservative to way to play both the stalling momentum in gold and the relative strength in equities - The upside is capped with this strategy, however it is still a relatively good risk/ reward, particularly with the higher delta spread (short leg being delta 70) - TradingEdge
AMEX:GLDShort
by Profit_Link