This Week Could Be Make Or Break For The Market

This Week Could Be Make Or Break For The Market

Posted On December 12, 2022 2:53 pm

For the past few weeks, stocks have been range bound as investors try to decide how the economy is faring and what the Fed will do under various circumstances. This has created a trend-less market, in which, neither bulls or bears can gain any momentum.

It’s an environment, which I warned about in this article “How to Play the Waiting Game”, that can lure people into forcing trades or getting whipped by false moves. The market has seen fast and loose intraday moves, with daily ranges in excess of 2%, but on a day-to-day basis there has been a real stickiness.

A lot of people, myself included, expect tomorrow’s CPI and Wednesday’s FOMC meeting to be the catalysts for a decisive move one way or another.

The SPDR S&P 500 Index (SPY) has had exactly 2 green days since November 23rd, the day before Thanksgiving, but it’s only 2 points lower, thanks to the monster move following Powell’s speech on 11/30. The range is bound by 390-400 which we’ve closed between 16 of the last 21 days.

In fact, you can see the SPY is currently at the same level as it was in May; the $390 level has acted as an important fulcrum point during this seven-month period.

Granted there was a near 20% rally and 18% decline during that period, but to be essentially sideways or at the same place after 7 months of 300 basis points in rate hikes, ebbing earning forecasts, crypto implosion, as well as war in Central Europe, is somewhat amazing.

Is this a sign of resilience or complacency? I think we will find out this week.

The options market is certainly bracing for a big move resulting from Tuesday’s CPI and Wednesday’s FOMC decision.

Looking at the SPY option chain, we see the implied volatility for options expiring on Tuesday and Wednesday are near the 50% mark, the highest reading for any expiration in over six months. It suggests market’s are pricing in a 3.15% move on each day.

For comparison, the IV for Friday’s expiration is 37%; for further illustration of just how braced up people are for the next two days IV for today’s expiration is 25% and the December 23 options carry an IV of just 27%.

As usual, Options360 isn’t making any bold predictions. Instead, we are trying to take advantage of this skew and harvest the pumped up premium surrounding the next few days.

We’ve done through a double calendar spread, that is buying both and puts calls that expire next week, while simultaneously selling puts and calls that expire tomorrow. The expectation is we will be able to roll the shorts into Wednesday’s expiration to collect additional premium (reduce cost/risk) and then we will see if the SPY breaks out of the range.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.