March 2021 – Red Pill Quants

Never Step In Front Of A Freight Train

If this market has proven anything to us then by now then it is that it wants to go up up up, and then up some more. Which of course makes absolutely no sense given that we are still battling a worldwide viral epidemic which, among many other aspects of our lives, has wiped out a huge swath of our global economies. However having the benefit of following the market’s gyration for over 20 years now I’ve long learned that what makes common sense – at least according to the basic rules of economics – unfortunately very has little to do with actually happens in the financial markets. For this is war and if this game was easy then everyone would be winner. But the opposite is true of course.

Approaching The Wall

Last week turned into a complete and utter roller coaster which traversed not only the entire weekly expected move but did so in both directions. Moves like these usually serve to confuse the average retail participant but they often present unique profit opportunities to savvy option traders. In fact what transpired once again confirms what I have been preaching here over the past year as well as the trading approach I outlined in my RPQ options courses.

Death Doom And Destruction

None of the above are actually happening, but I sent out a feel good newsletter with a hopeful premise for the future yesterday and a bunch of folks were actually wondering if my account had been hacked. ‘Who are you and what have you done with the Mole?!!’ So I just wanted to assure you that I’m alive and well and not chained up in some rat infested dungeon. Guess I won’t be making that mistake again! Anyway, now back to our regularly scheduled programming:

Honestly I can’t think of anything overly insightful to share about the current market as we seem to be treading water. The tape for sure ‘feels’ bearish but there’s always that JIT stick-save that draws us away from any hurdle that may impose excessive gamma risk.

On a more long term basis the one thing that stands out is the fact that the IV Z-Score continues to drop and no matter what happens in the bonds, in big tech, the Dollar, or anywhere else financials continue to hold this market.

Speaking of big tech – yup it’s looking pretty droopy and the mini bear is in sight at least until the NDX manages to breach back above the 13,400 mark. However that said – nothing truly bearish happens until 12,200 is being taken out.

The VIX also seems to have petered out near the 20 mark now. I have to say that this is a positive sign and obviously there are now two avenues in front of us:

We hold here for now and we option traders take advantage of the biggest IV buying opportunity of the year.
We drop below the 20 mark and stay there for the foreseeable future. Which would mean we just completed a small sideways correction and it’s even higher equities moving forward.

I guess whatever was done to alleviate the impending crisis in the interest rate swap market has been addressed as the long wick extending to 91.37 looks like an exhaustion spike to me.

Now let’s look at what’s happening in the bonds, currencies, and even on the crypto side:

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The 30-year has not been able to break its current series of lower highs and lower lows. The current spike high at 157’17 looks just like another wiggle to me and until that changes nothing has changed in bonds.

Again as I insinuated the other day. This is going to work in favor of financials until that one day when it completely flips and starts working against them, and the entire rest of the market. So in some respect I’m watching this in bemusement.

To the noobs: That does however not mean that I am going to trade in a contrarian fashion. You never ever argue with price, it’s the ultimate arbiter of truth when it comes to trading the market. For now bonds are in a bearish down cycle until they prove otherwise.

The Euro – thank the heavens it’s finally dropping a little. Some of you know that I live in Europe and the exchange rate is killing me. The ATM fees at the local nudie bar alone have nearly doubled! J/K 😉

Seriously this has nothing to do with a ‘strengthening Dollar’ – it’s merely a sign of increasing weakness in the Euro. You won’t find much information in the financial MSM but the European banking system is in big doodoo plus the EU has made a royal mess at managing the COVID crisis.

Anyway, if it drops through 1.16 then we may actually be looking at a cycle reversal here. Until then it’s nothing but a medium term correction, so treat it accordingly.

Bitcoin – I haven’t been talking about it here much in recent years as most of this crew doesn’t seem to be interested in an asset that has grown over 900% in the past year. I’m almost halfway joking – some of you regulars may recall many years back when I posted an entire series on crypto currencies but it quickly became clear that most of my readers weren’t interested.

And I’m not saying that to ruffle feathers – in fact it’s perfectly normal. And you know why? Think about it. What is the main thing people hate the most about cynics and pessimists? Their attitude? Their snark? Their narrow-mindedness?

Nope.

What people hate the most about cynics and pessimists is that they are usually proven correct, probably over 90% of the cases. It’s difficult being an optimist or visionary because people like that usually end up being proven wrong, and are then ridiculed for it.

Which is the very reason why the remaining 10% of times they are being called geniuses and well – true visionaries. They had the foresight that nobody else had and they get to enjoy the fruit of taking the risk.

I actually bought my first Bitcoin for the then eye watering price of $440 back in 2014 – oh boy, how things have changed. I did hold some of that but I also spent quite a bit of it. So I guess I was about halfway there.

But it’s always good to look back and be honest to yourself about your ability to predict the future. None of us really are able to do it and maybe for the better as it would suck all the fun out of the struggle that is life.

Anyway, BTC – right – look at the tape all the way into the EOY 2020. Nice advance there – of course thwarted by what happened over the past three months. But also look at the tape in itself. A lot more (realized) volatility which shows that the mentality suddenly shifted in some way. Wilder swings mean more activity, more controversy, more assets flowing back and forth.

From a tape reading perspective (see my Price Action Masterclass) a transition into a high volatility bull market however also means that we are nearing the end of this bull cycle and that we may be looking at a large correction again later this year.

To that end I have actually developed a number of blockchain based market measures that I’ll be deploying here over the coming weeks and months. Definitely something to look forward to 😉

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It’s Just A Flesh Wound

The durable goods report for February came out this morning and thinking linearly – as usual – mainstream analysts expected positive growth to follow that of the previous 9 months. Unfortunately reality stomped on that little phantasy as it turned out to be a tumble instead of small gain which had to be the general consensus (LOL). Strangely it appears that locking down half of the economy and putting large swaths of people out of business will come at a price sooner or later.

The Art Of Swinging For The Fences

A subscriber who bought my Options 201 course wrote me today asking for some clarification on how to best stack your weekly butterflies. There were four aspects to his inquiry, namely: 1) which expiration to choose on which days of the week 2) how to distribute your exposure 3) deciding directional bias and 4) structuring ones trade based on the current IV environment. Let’s tackle these questions one by one:

Down But Not Out

I received a few emails asking about my posting schedule this week, and clearly it was from people who had not seen the heads up I posted last Sunday. So, just to ease everyone’s mind and to stave off further inquiries here’s the elevator version of what’s going on: I had eye surgery yesterday (acquired strabismus) which prevented me from putting up a post. Everything appears to have gone well, meaning I can still see with my left eye but my face looks like as if I just went three rounds with Lennox Lewis. And that’s pretty much how I feel as well, meaning I’m still a bit out of it.

Beware The Ides Of March

I felt a little bit like Julius Cesar today, getting stabbed and prodded all over the place in preparation for my ‘procedure’ on Wednesday. Unlike Julius however I survived the experience and at least thus far it appears that my rapid COVID test has come out negative as I was told I would receive a phone call otherwise. Anyway, with enough time left before the opening bell I decided to quickly put together a post for you guys:

On A Personal Note

I rarely talk about myself as a rule for a number of reasons. Personal privacy is one of them but the most salient one being that, unlike most people today, I don’t regard myself as particularly interesting or worth of public attention. Of course as part of my weekly posting regimen I’ve let a few things slip here and there. So if you’ve been visiting this digital den of market domination for more than a few weeks then you are probably aware that I had to battle some health problems over the course of the past two years. I’m proud to claim victory on that end, meaning that I’m back to normal now, but there is one lingering issue that has continued to plague me for about a year now.

Sweet Spot

One of the more obscure topics I cover in my options courses is the difference between probability of expiring (POE) and the probability of touching (POT). This can be exploited by a savvy trader as the cost basis of every option is squarely based on the probability of expiring in the money (ITM). However most retail traders remain oblivious of the fact that very few ITM options will ever be held all the way into expiration.

What Everyone Knows Isn’t Worth Knowing

Clearly I am not talking about basic algebra here, but in the context of participating (and surviving) as a trader in the financial markets this time tested maxim has rarely let me down. One may counter by pointing at social manias or the various financial bubbles we’ve seen implode over the past two decades. And I would agree for there is a not so subtle difference, but it is a very important one to which I decided to dedicate this entire post, as it will make you a better trader over the long term.

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Monthly Archives: March 2021