Posted on September 3, 2020
Under normal circumstances, we at A Jew and His Money would not be able to employ our calendar straddle strategy so aggressively.
We’re doing so because current market structure is skewed in such a way as to not only permit its use, but to thrive on it.
That said, gentle reader, please understand that current conditions won’t last forever.
And that means our highly effective means of capitalizing on it will eventually also run its course.
Without getting overly technical, we’re currently enjoying very HIGH levels of implied volatility concurrent with a market top – a condition that rarely obtains, but that allows us a good deal of near term premium to pay for our longer term straddles.
What it means for the future is not so clear at present.
It could lead to something immediately catastrophic, or it could continue for some time… and then lead to something catastrophic.
In either case, we have a situation where a flood of CALL buying (as evidenced in extreme PUT/CALL ratios) is forcing market makers to buy great quantities of stock to hedge their oversized short CALL positions. That in turn forces stocks higher, invites even more CALL buying, and the process continues.
As we mentioned, however, we’re also seeing volatility increasing as share prices rise, the opposite of what usually occurs. This is due, in the main, to the excess demand for CALLs, which, of course, naturally drives up their price.
What remains to be seen is whether prices for CALLs are expensive ENOUGH.
That is, the fragility of the situation cannot reward CALL buyers forever.
It’s likely also only a matter of time before insiders with massive positions in those same high flying stocks (that are seeing all the CALL buying), step in to sell CALLs en masse, thereby taking the pressure off the market makers (and pulling the rug out from volatility) – transforming the whole brittle, chaotic meltup into a shivering snowflake sell-fest.
We can’t imagine why APPLE, for instance, wouldn’t find a means of stepping in today to sell CALL options on its own stock.
Or Elon Musk on TESLA.
Or Bezos on AMAZON.
They’d make a fortune.
Big tech already controls the rest of the world…
Why shouldn’t they start making markets?
Alan B. Harvard