| Last week, I walked through my case for a 5-10% correction in the S&P 500. It wasn't a guess; it was based on a signal that I use. That signal is derived from the volatility markets, and I used that signal to walk through how to hedge an equity portfolio and trade the VIX. While stocks needed a breather, the moves in the precious metals markets were less clear and yesterday gold broke. | Hedging and Volatility Spreads | Right now, we're only 4% through my expected sell-off in the market, but the great thing about taking profits and hedging ahead of the selling is that you're ready for ANYTHING. What that means is that the market could be down 20% this month and you don't really care. If the market goes up a lot, you'll lose out on a little of the upside. However, the sell-off was already large enough that I walked through rolling the long puts to a lower strike and buying back the call spread that was sold to pay for the puts yesterday. That means you're still protected, but now the upside is uncapped with a little extra money in your pocket. | For the VIX spread, I walked through closing the 18 MAR 25 16/20 call vertical in the chat just after the market open. That spread was closed for a 70% gain in a week, and I posted an announcement in the chat room to consider opening a new spread in the same expiration at the 25/29 strikes. That means that we have something out there in case the market gets crazy. | Right now, the VIX is up against the 20 level that we built the VIX volatility spread around. If we get some traction above that level we may see more selling. At the moment, the 3-month VIX (VIX3M) is trading near the same level is the 30-day VIX (VIX), and so we may be nearing a short-term bottom. The VIX3M finished only about 3% higher than the VIX, but pushed below one during yesterday's trade. | | Gold Resistance | What about gold? This is a tricky area with so much chatter about gold repatriation back the U.S.A. and shortages are the bullion banks in London. That being said, there is a paper market for gold (like gold futures) that may be running hot. Sure, it sounds like longs are wanting delivery and the market seems pretty sound, but the risk is always about the U.S. dollar and its demand. Yesterday may be a buying opportunity in hindsight, but prices are really extended, and yesterday's option pulses were the first bearish signs I've seen in a while. | Looking at the chart, the price of SPDR Gold Trust (GLD) just broke the 10-day EMA and has really detrended from the 50-day SMA. That means there is risk that the two converge through a long consolidation or correction. Gold is a difficult short at this point, but it may be an indication to look to take profits if you're a gold long. | | Option Pulses | There were three Option Pulses that I saw yesterday that I thought were significant and dovetails with the theme of my session today, Intermarket Wednesday. | Option Pulse #1 | SPDR Gold Trust (GLD) | Following the options market in GLD has been a great way to identify turning points. Yesterday, there was a significant print in GLD that caught my attention: | · 16 MAY 25 $260 puts | These puts were mostly bought and is one of the first bearish trades that I've seen in a while. The trade fits with gold seasonality that generally runs out of steam in late January and February. | Option Pulse #2 | Halliburton Co. (HAL) | Similar to gold, the oil supply situation has been really tight and the oil futures market backwardation reflects that. However, we've had some large oil inventory builds in recent weeks and oil prices look like they may be looking to test the floor of support around $66: | · 7 MAR 25 25.50 puts | These puts were mostly bought for next week's expiration. The price looks poised to retest the February 7 low of $25.16 but may readily fall below the level if the price breaks the gamma level at 25.50 from the option print. | Option Pulse #3 | iShares 20 Plus Year U.S. Treasury Bond ETF (TLT) broke $90 | Bonds found a huge bid under it yesterday as TLT broke $90 and the 61.8% Fib level. On the breakout there was a significant trade that materialized that really stood out as it benefits by the volatility skew of TLT: | · 19 DEC 25 100/105 long call vertical | · 16 MAY 25 97/112 long call vertical | Both of these significant prints bought the lower strike call and sold the further OTM call for a debit. These trade benefited from the volatility skew that finds the lower call strike with a lower implied volatility than the further OTM strike, making the spread cheaper. | The December expiration is way out there in time but is a play on the possibility of the Fed cutting rates this year, likely on economic weakness. While all the talk is about inflation, this is a play on that possibility. The nice thing about this type of setup is that it's a low risk high reward play on yields coming down. | | Option Pulse Opportunity | This is certainly a long-shot opportunity, but something to consider if you think the inflation story may be overplayed heading into the end of 2025. | · Buy the 29 DEC 25 115 call @ 0.70 | · Sell the 19 DEC 25 130 call @ 0.28 | This trade could be put on for around a $0.42 debit and has a max gain potential of $14.58. That's a very low risk and very low probability trade, but casting a line in some bearish, deflationary waters may have big upside this year. |
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