Don’t Wake Up in a Roadside Ditch

When your investment portfolio has a negative annual returns for over a decade you get mad and when you get mad you turn on the TV and listen to CNBC.  When you listen to CNBC you hear a lot of things that don’t matter like what is going on in Europe overnight, whether economic data beats expectations and whether we are in risk-on or risk-off mode.  When you hear these things that don’t matter you don’t get more angry you get scared.  When you get scared you buy put options on the S&P 500 right in front of expiration.  When you buy put options in front of expiration inevitably the market rallies and your premium goes to zero.  When your premium goes to zero, you go out and buy a bottle of Thunderbird.  When you buy a bottle of Thunderbird you get hammered and pass out.  When you get hammered and pass out, you wake up in a roadside ditch.  Don’t buy put options in front of option expiration.


it seems these days the market wants to rally in spite of itself.  Our 1165 pivot worked like a charm but the Spain bailout reversal put us on alert as the market is trading with some intense volatility which tells us money is scared and trading is illiquid.  Nevertheless, yesterday’s close remained above Friday’s low at 1307 and today we had a nice bounce as the shorts continue to beat themselves up.

With quarterly expiration approaching we thought the market could be setting up for some sideways premium burn and while anything can happen the market just has that look.  In fact in checking open interest for the SPX June expiration we see that the largest strike price by a factor of 2 is the 1200 puts at 247k contracts.  It would be very difficult for the market to get too much downside momentum with such a massively short position underneath.

We think holding 1265 keeps the pressure to the upside.  With the U.S. Open this weekend as well as Greek elections we doubt any big bets get placed for the balance of the week.  We advise a wait and see approach as we get thru the elections and next week’s FOMC meeting on Wed.  There should be plenty of opportunity to position once the market breaks from this range meanwhile you can avoid getting chopped up in the expiration premium burn.

As you see the overhead pivot is 1340 and we doubt the market can get the energy from here to get through that level so look to continue back and fill and the potential for a nice reverse H&S rally when expiration is out of the way.  good luck out there, trade ex ante…


About exantefactor

capital market veteran of over 15 years covering multiple asset classes. Focused on analyzying markets ex ante (before the event).
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