Financial headlines are easy to mock. “Traders revive chances of half-point Fed cut with just days to go.” “NVDA at lows not seen since mid-August!” The contradiction cycle keeps tightening. Asset prices head faked a bad week followed by a good week, and the SPX is within a few basis points of where we started the month - and not much further from all time highs.
As tends to happen when there are multiple percentage down days, the puts get bid. Compared to today, the downside was slightly more expensive, but not quite a panic. You can see we’ve gotten a little softer on the left side of the curve since. But this wasn’t the dip buy or vol sale of the century. Words are significantly louder than actions.
One of my theories about financial markets is that we’re getting faster and faster in some places, but standing still in others. The cycle is tightening between the “voting” aspect of orderflow that nudges prices temporarily inefficient, and its balancing force of “weighing” that arbitrages and seeks value. That’s a good thing for everyone, even the structural market participants who benefit from inefficiencies currently.
The human limbic system is not evolving anywhere near as fast, and anyone with a discretionary trading account is sent on an emotional roller coaster. You know who you are. A couple single stock picks, overwriting more and less of your shares. Selling puts when you see some pop potential. I love this kind of trading - it keeps you interested. Putting capital on the line where you see opportunities and learning all the time.
But the last two weeks has left many of those trading hands cut up. AMZN was implying 28 vol at the 10 day interval, and then rallied nearly 10% off the lows a week ago to its August 1st level. The laws of probability allow that - but it’s a big directional bias to the distribution.
So how does an overwriter handle the whip saw? Even if you can ignore the headlines and concentrate on your trade horizon, the price action speaks its own language. Here’s the second installment of “Fifty Ways to Trade an Option” - The Rebound Covered Call.
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