Risk Managed Momentum

How to capture the premium, and the move

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Setting the Table:

• After a slightly hot CPI number threatened to take out the legs of a bull market, major indices have rebounded and are trying to find their direction this morning. Fed parsers will look at the specific components of inflation, and PPI this morning shed a bit more light. Inflation isn’t going anywhere…

  • If you’re counting the number of rate cuts, or trying to predict the market’s reaction - that’s a mug’s game. Put your investments in $VOO and stick to horseracing. Might we be choppier? Maybe. Are we going one way or the other, definitely. Focus on risk managed opportunity if you’re going to trade. 

• Tuesday’s session saw a little bit of a spook in volatility, but as readers of Trading Opportunity know, it didn’t do much for overall levels. Implied vol expectations the next day via GARCH barely moved, and implieds agreed.  Below is the skew curve on Tuesday’s close in black compared to yesterday’s close in orange.

  

  • We can see that vol is back in. 10 day volatility pictured here saw a “shock” up two points. That turns the expected range over a 10 day period from 2% to 2.4%. 

  • Week over week we are still higher however. Compared to the green level of last Friday, we’re net up about a point ATM. The downside also looks a little bit perkier at the wing deltas. At 10 days out the 20 delta level where that bends upward is roughly SPY $494 - a little over a percent away. 

  • As a reminder about how much it takes to move back month volatility, here is the 90 day figure. We’re up 40 basis points ATM. If we insist on making it about inflation, the data coming out does seem to conflict with the optimism of cuts. But for all intents and purposes of a medium term options strategy, this is jitter.

    

Identify:

• For a while I’ve been looking at the chart of NVDA, scratching my head and wondering who is buying into such exuberance. The answer is someone who wants to be up 30% on their month.

  

  • If anything has spiked as hard as their stock price in blue, it’s the implied volatility levels at 30 days in green. 

  • This creates the opportunity for interesting trade setups. One look at what OpenAI is doing and it’s easy to be bullish on the number of chips needed. 

• We see a number of quality names with a naive filter of just those hitting their upper Bollinger limits. About 15% of just the Top250 liquidity names are over their 50 day 2 STD level. More than twice that many are over their 1 STD level.

  

• Is there a risk managed way to get involved in momentum plays without the capital requirements or downside risk of owning stock?