This week, so far, has been a big snooze.
As far as the equity markets are going, most of the quarter’s action happened last week. The moves up on the back of the European Central Bank and Federal Reserve printing action pretty much tore the cover off the ball. Now the market is up 16% for the year, and much of the dollars are still sitting on the sidelines. I am wondering when the inflows to bond funds are going to slow down.
MID MORNING RECAP
Either way, the S&P 500 is trading 1457, down about 3.48 points, and the Nasdaq 100 is trading around 285, 4 down 2.06 (without any help from AAPL this morning). The market is feeling like not much is going to happen before earnings start mid-October, and I agree with them.
COLLAPSE IN SKEW
We have been looking at the collapse in skew since Friday. Basically, this means traders are paying less for put protection relative to the at the money options. This is usually a sign that player don’t feel much will happen, since the bid for options starts to subside.
WAYS TO PROFIT
A way to trade this environment would be using a position that benefits from cheaper downside options. That type of trade is either a ratio backspread or an Iron Butterfly (that way the wings of the fly are cheaper). Since the market is really in a sort of no man’s land, on big news keep the duration short, say September Quarterlies (well ahead of non-farm payrolls), so the contracts expire ahead of time.
IN THE MONEY
A trade that works best would be a just in-the- money iron butterfly (so the short strike is just in the money) with a long call (keep it inside the Iron Butterfly strikes) on the upside to flatten out the deltas. The positive decay should help wade through the small chop of the next two weeks.
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