Welcome to The Juice, where we give an overview of different stocks categories and sectors through the options markets.
What big plays are we seeing? Where are the hedges? Continue reading to find out.
Market Overview - Broad Market
The rally we saw the week before Thanksgiving was completely obliterated in Friday’s shortened trading day. It’s been well-documented that shorting the market the week of Thanksgiving is one of the most un-American things you can possibly do. Some big players seemed to have taken that literally and so the market dumped the day AFTER we all feasted on Turkey and Mamaw’s sweet-potato casserole. They say a trader is most vulnerable after an abnormally large meal.
Anyways, here’s some of the top ETF performance we saw from Friday. Warning: It does not look good (worst day of the year for some indices and since 2020).
Here’s a break-down of the top asset categories from Friday. Volatility and leveraged volatility were the clear winners here:
On the losing side we saw oil, South Africa plays, and commodities making the top of the list.
What was the reasoning behind this rather unexpected move to the downside?
1. A new covid variant has emerged out of South Africa. It is said this variant is even more contagious than the Delta variant. I know this because every Fintwit account has now become an expert virologist and commented on the situation. The Biden administration has already implemented a travel ban and flight restrictions from the affected countries.
2. Powell re-nomination and the fear of an earlier than expected taper. As we know, inflation numbers were hot last week and many believe the Fed has no option but to raise rates and cut the taper sooner/harder than expected. This is a tough area to speculate on and so I’ll leave it for the professionals to decide what to do. In JPOW we trust.
3. China’s regulators have asked ride-share company Didi (DIDI) to de-list in U.S markets causing a ripple effect among other Chinese holding companies and to many other names.
Market Overview - ETFs
With the market beatdown on Friday you saw the VIX exchange traded notes (VXX and UVXY) explode as traders bought protection. This is a rare scene in the last 12+ years, but when it happens it is pretty impressive to watch these rip higher in single sessions.
The options position (using the OptionsMatrix "VIXinator" Discovery Scan) in the actual VIX options market itself was strong, with (2) strikes - June and January - where it appears traders were making their largest Volatility bets. You can see the large squares on the left with the actual contract dates.
Here is a more detailed view by contract of the most popular VIX options contracts on Friday:
On the index put side, they were trading SPX contracts in the next two weeks (predominantly) and some out to January+ but you do see some VIX puts here as well. It will be interesting to see if there is any follow through to that on all week this week. This is month end, so you could see weakness Monday/Tuesday and then face ripping again on Wednesday with the new month. That's purely speculation from us, but don't be shocked if that happens with the amount of liquidity still sitting around waiting for an opportunity to come into the market on any real buying opportunity.
Market Overview - Options Heat Map
Option Flows into some of the indices was quite bearish on Friday, as expected, but what was interesting to see was the call volume going through individual names. Flow in big-tech stocks like Amazon, Apple, and Nvidia was still on the positive side even after a beating like we saw. Looking at the OptionsMatrix “Bull Run” scan what we were seeing was essentially a lot of Apple (AAPL):
Volatility has spiked (see above options re: VIX) and as noted from earlier editions market breadth has been consistently low over the last several weeks. Breadth is a measurement of how many individual stocks participate in moves to the upside relative to the market as a whole. A low breadth means that although indices like SPY might be rising, many individual names are not participating in the rally. What we’ve been seeing is the market and ETFs like SPY continuing to make new highs, which has mainly been driven by AAPL, TSLA, and NVDA, while small and mid-caps continue to be bogged down. In fact many small cap stocks have been in a down-trend for some time.
Since breadth is low the market has been leaning toward a stock-pickers game. Momentum is changing sides rather quickly and is becoming more and more reactive to news headlines. Until this changes and we see more market participants being included in big rallies to the upside we’ll need to stay nimble with our trades.
Matrix Scan - The Bears Den
Using the OptionsMatrix "Bears Den" Scan you definitely see some of the more recognizable 'Re-Opening' theme names on this list include: DAL, AAL, RCL, and CCL.
When it comes to the virus and restrictions nobody knows what is going to happen. Players could be setting themselves up for the “what if” scenario and it’s always better to be prepared than to be left in the dust. A lot of these plays go into December and the winter months until the trend might start to wear off, so it will be interesting to keep an eye on.
What to Watch - Upcoming Week
With how reactionary the market has been to news headlines it’s almost as if these players are chasing to be first to get on the momentum train and ride it until it wears out, then hop on the next MoMo headline. Here’s the current rotation at play by main-stream media.
Hopefully this ETF TradeScape visual (showcasing the options flows by ranking the top ETFs by premium) sees this massive VXX green bar below on Friday turning red sometime early this week (which would mean that it is back to predominantly PUT premium instead). This would mean volatility has finished spiking and index buying will take control again. If not, you may start seeing some other passengers on the plane start to reach for the vomit bag in the seat in front of them.
Daily Fantasy Stock Games
Don’t forget to sign up for one of the many games that are still open this week to earn some extra spending money. There are still a few slots open for Monday’s game so get your stock picks ready. Here's the list of this week's contests!
We hope everyone has a great trading week! Make sure to check out our Fantasy Stock Games this week as we start Week 5 of the contests and we are continuing to build out player rankings behind the scenes plus a ton more coming in January. Enter for free to any of our numerous contests this week and show your stock and crypto pick 'em skills!