Here is a quick recap of all of the trades that we initiated, closed, managed or expired in the week that was July 1st through July 5th:
Monday July 1st:
Quiet start to the week, as we were mostly in wait and see mode given that the holiday week was likely to be slow. The main reason that I cited in the Submit Your Question section in response to a question for why we are still relatively negative on stocks:
The main reason for the negative view on stocks is as follows:
The S&P 500 is slightly higher than it was one month ago and two months ago. Compared to two months ago, we have seen the following:
1) The 10 year interest rate is up by more than 1%
2) The U.S. dollar is up substantially vs. all major currencies
3) Global equity markets are substantially lower (5-10% in Europe, 10%+ in most emerging markets and Asia)
4) Earnings guidance in the U.S. is running at its most negative ratio in more than 10 years, and we’ve already seen negative reports from multinational names like ORCL, ACN, and FDX.
5) Credit markets have gotten more stressed, as high yield, municipal, and even investment grade credit are significantly wider than they were at the start of May
6) Oil prices are up 10% mainly due to political risk in the Middle East and North Africa, while industrial commodity prices like copper and aluminum are lower
7) Implied volatility for most asset classes is above average compared to the past year, indicating increased stress across financial markets.
With that backdrop, we see an unprecedented number of signals of concern relative to the past year, but U.S. equity markets have held up. They can certainly remain bid, as anything’s possible, but the probability of a move lower in stocks in the next month is much higher than normal in our view, given the number of negatives that have built up.
Tuesday July 2nd:
Name That Trade: Buy GG or NEM Call Butterflies
We are a bit wary of the precious metals because of our view of dollar strength, and it’s always dangerous trying to catch a falling knife. But we wanted to do a deep dive on the gold mining stocks because they are at their lowest level relative to gold over the past 10 years. In the course of that digging, we singled out GG and NEM as our favored names that are likely to remain solvent even if gold prices continue lower, and where the baby might be thrown out with the bathwater on the recent selling bout for the sector. GG is our favorite name based on this week’s price action (didn’t make a new low), and we might pull the trigger on a long delta trade in the upcoming week.
Wednesday July 3rd:
Considering Our Options – TLT
In retrospect, we of course wish we had taken this position off. We wanted to make sure to post this COO about the position before the jobs report because we would have taken the position off it was not for our other trades that we had on. In the end, stocks showed much more strength than we would have expected given the 25 basis point move higher in the 10 year yield on Friday. At this point, this trade is a long-shot, with the hope that TLT makes a move back to 110 at some point in the next 5-7 trading days to salvage some premium.
Friday July 5th:
Trade : Buy the VIX Aug 15/20/25 Call Butterfly for 1.35
Enis: CC had laid out our thoughts on this potential trade on June 27th, with the intention of putting the trade on if the VIX approached 15 at some point. Our main thought is that realized volatility in the SPX index is higher than it has been on prior occasions when the VIX fell back below 15 earlier this year. With the steep fall in VIX futures on Friday, we took advantage of the favorable entry to initiate the trade, but decided on August instead of July because July VIX futures expire in only 8 trading days. This trade structure allows us to be more patient as we await the next move higher in the VIX.