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cuegis

A Bubble?

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We all know what happens as we approach earnings.

We know how to calculate the risk of holding through earnings and we typically do not do it because the market has to move more than a very inflated expected move.

Earnings are a "Known/Unknown".

I try not to have an opinion about the market as much is practical but.

We have one of the biggest "Known/Unkown/Unkowns" in history coming in 1 week.

The change of President, and an Administration, that is even more radical than from one party to another after 8 years.

Trump is an outlier. He is beyond, just going from Democrat to Republican.

The big difference between this and an upcoming earnings is that right before earnings are announced , IV is at a very high extreme.

We have a bigger unknown coming in a week and IV (VIX) is trading at the lowest level EVER!

It seems that this would be the opposite of buying vol and holding through earnings.

In this case, unlike earnings, IV is saying it expects the market to NOT move compared to all historical precedent.

And every day, as we approach the inauguration, the market rises and VIX falls.

It just looks and feels like the makings of a "Bubble".

We know , over the long run, it is a losing situation to inventory IV because theta will kill you while you are waiting.

But, this seems like a very specific, unique situation because of the extreme of the event about to take place, and the greater extreme of the historically low prices of options all around.

What say you?

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I read and listen to a lot of economists and money managers that I think should garner some respect. David Rosenburg and Grant Williams think the market is loft and will more likely than not fall into recession. David Rosenberg especially backs this up with a slew of charts and statistics showing how the economy has changed. He was mostly correct with the bull run and the previous recession (if I recall correctly). 

I sat in on Jeffery Gunlach's webcast on tuesday where he talked about the economy. This guy is famous for correctly calling a lot of trends. one year ago he called the bottom of gold, and that oil would go to 50ish, and was emphatic that trump would win (note this was way before the primaries). He thinks the market has priced in lots of Trump related growth (infrastructure changes, repeal/replace ACA, tax cuts, reduced regulation, etc) that (a) takes longer than expected to enact and (b) may not be as strong as they think. He is also shocked that the market is not concerned about all the anti-trade related talk coming from Trump and how that would effect prices.

He points out that infrastructure changes take years, and the tax cuts are targeting the weathy and not those likely to spend. But on the otherside, he is bearish on the dollar since Trump stated that a strong dollar makes things tougher for the economy, see's earnings rising this next year, and says unemployment is doing well. He says there is no recession in 2017, but suggests taking US equities and putting them into international equities.

I see few people calling for the market running higher, many calling for a recession, and some call for sideways action. 

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I believe that timing is everything. Will US fall into recession? 100% The only question is when. It could happen tomorrow, or the markets could go up another 50% before the correction.

 

Historically, we have bear markets every 6-8 years. Last one ended in 2009, so we should be pretty close to the next one. Will we follow historical patterns this time? The truth is nobody knows. Some pretend to know, but again, it's all about timing. Robert Prechter made himself a name by correctly predicting the 2008 crash, but people forgot that he has been predicting a crash every year for the last 30 years..

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53 minutes ago, Kim said:

I believe that timing is everything. Will US fall into recession? 100% The only question is when. It could happen tomorrow, or the markets could go up another 50% before the correction.

 

Historically, we have bear markets every 6-8 years. Last one ended in 2009, so we should be pretty close to the next one. Will we follow historical patterns this time? The truth is nobody knows. Some pretend to know, but again, it's all about timing. Robert Prechter made himself a name by correctly predicting the 2008 crash, but people forgot that he has been predicting a crash every year for the last 30 years..

 

I have been thinking exactly the same thing for a very long time.

We are hitting the 8 year mark this year and just on the basis of natural economic cycles we are in the time frame for a recession.

But, what I was writing about was, what I believe,is an outlier situation (Trump). That REALLY an "unknown/unknown". But we know when it will begin at least.

I think he could be a very different situation than the normal Republican/Democrat paradigms.

Not to mention that we have had 2 8 year massive bull markets under the last 2 Democratic Presidents (Obama, Clinton) and a bear mkt under both Bushes.

The bigger point is that a time of so many unknowns, and potential outliers, IV and VIX is at it's lowest point in history.

So it is not like buying IV and holding it through earnings. Because , during those times, you are buying the most over inflated IV, and it WILL crash after earnings are announced.

But, unlike earnings, the opposite, is buying the lowest possible IV before the event.

Yes, it is true that earnings are a 1 day , binary event and with Trump, it will take some time ( could be 2 weeks or 6 months) to see what is going on for real, not in predictions.

But, we KNOW it will be a massive change in direction from the past 8 years added on to the correct time frame for a recession.

 

 

Edited by cuegis

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