Up to now, despite Friday's minute blip, most traders would have said this relief rally has some legs to it. Much to my surprise, the market has roared back to 1340 (I thought it was going to be stuck between 1310-1320 for at least a few days). Now that we are back at 1340, the big question is whether the market can make 1340 a floor and run towards 1400, or is it heading right back down to 1270?
As you can see, 1340 has been acting like more of a ceiling over the last few months than a floor. We did briefly break through, but the market quickly turned around. If we look at today as an indicator, many are betting that the market is going to bounce off of 1340 rather than break through. This is because the VIX and SPX is up today. As you can see, in this graph of LiveVolPro's version of the VIX, IV was up today after flooring out yesterday.
Statically, when the market has been up on the same day that the market is up, even when not adjusting for weekend decay, (my bet is that if we did some adjusting for weekend decay), a stat that is statically relevant would become almost an indicator. There are a few other factors that are pointing towards a turn around as well:
1. Skew is steep in August and September: upon reviewing the IV structure, it appears that not only are puts pricy, but so are calls. This indicates many traders are protecting their underlying positions with puts and/or replacing them with calls.
2. Term Structure is still pricing in a way that says the market is unsure of what is going on. While there was a day or two where front month options were completely over sold, they have for the most part caught a touch of a bid. While I think straddles are still a little cheap, they are nowhere near as cheap as they were on Monday morning.
3. With the looming debt debate, I think the market could start to catch a small IV bid into the talks, especially if there is some doubt as to whether a deal gets done on time.
Looking across option's structure, there are some GREAT deals out there for those willing to buy premium. EWZ is still cheap, GLD is inexpensive, and several other high priced stocks seem interesting as well. For those that want 'income trades' the only thing that looks remotely interesting is a SEP condor and possibly an Aug/Sep calendar (At some point this week I am going to discuss why anyone who trades income trades probably has no income).
Trade Idea:
One trade I kind of like right here is bearish, AVSPY. I think AAPL is overdone and am not sure SPY takes a dive anytime soon. Heading into AAPL earnings, I wouldn’t be shocked if AAPL sold off. This makes the AVSPY likely a little overpriced. It closed just under 135; I think the 134/130 put spread for around 1.30 could be a really interesting play. The IV tends to rally when AVSPY drops so this play could really work quickly.
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