Burgers and Rockets

MCD & RKLB: Protecting Gains and Playing for More

Setting the Table:

• Yesterday was quiet in anticipation of announcements later this week with only 43M contracts trading, but that didn’t stop the delta train from adding another percent to the Nasdaq, Russell or S&P 500 (+97bps…). 

• As we climb back towards early summer highs, liquidity has also returned to the market, as we see SPY rebounding, and QQQ even more aggressively so. The predominant driver of index liquidity is spread widths as volumes are relatively light.

  

  

  Straddles for this week look fairly calm considering the various word salad interpretations that could come out of Jackson Hole. Powell doesn’t speak until Friday morning, and while QQQ looks slightly more reactive, we saw 140 bps yesterday and Friday’s straddle is priced at 163 bps.

  • Straddles are deceiving, because while we see strong trends, volatility also prices reversion. These must be actively managed positions, because early moves don’t necessarily pay out. It’s all about expo with a short DTE.

    

• If you were looking for a one day trade in SPY yesterday, you didn’t have too many choices. SPY is the most liquid stock around, but with it closing at $559.61, there was only a $560 and $565 strike. $0.60 or $0.02; 30 or 2 delta? They’ve added in strikes this morning, so there will be a lot more texture for intraday traders.

  

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Strategies must have a solid theoretical framework, but they also need to trade real strikes. Use the Strike Finder and Structured Product tools at TheTape to analyze real trades. They’re totally free tools.

Take the theory of a covered call or hedged equity target, and quickly compare what options you can actually buy or sell. 

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This week our lens is momentum, and today we will talk a bit about the difficulties of capturing the early part of a new move. Even in SPY the strike listings can be chunky when the underlying moves around a lot, and this is exacerbated with low dollar handles and less granular activity. 

Listings are a double edged sword. Market makers and exchanges don’t want to waste capacity if there isn’t trading. More strikes bolster activity when there’s lots of volume, but have a negative impact when order flow dries up. 

Strike Pickins