Options Insight: Chop, Nvidia, and Jackson Hole

A bounce in the earlier week gives way to more choppiness. Nvidia surprises and Jackson Hole snoozes:

There are two very simple reasons why I don’t trade the news.  The first is the most obvious and that is I don’t have a crystal ball so I find trying to predict the future is very difficult if not impossible. Although I do take an earnings bet from time to time many times I end up having buyer’s remorse.  

After several years of back testing and analysis I’ve come to the conclusion that some of my best trades are done after news comes out, or when markets are fairly quiet and trend is a little more predictable.

The second reason is a little less obvious and that is simply that the outcome of any given news is only one part of the equation, but the reaction is oftentimes just as unexpected as the outcome itself,   Nvidia is a perfect example of that.   

By all metrics Nvidia beat all expectations and had amazing guidance by management, yet the stock did nothing but disappoint after an initial surge.  (see below). This could mean there are no more interested buyers for NVDA or perhaps the overall tech sector, because many others followed its lead. See LRCX below as well:

After a terrible week last week I did anticipate the bounce that we got earlier but what really made me a little bit more bearish was Thursday’s price action and huge bearish engulfing candle in the S&P 500 (see below).  

This caused me to be more bearish which actually hurt me on Friday because we did see a decent rebound.   At the end of the day the broad market put in a 79% increase on the week, so I held onto bearish trades for now.  The chart below shows “nowheresville” for now, but a potential test of the recent low coming this week.

Halfway through Chairman Powell’s speech I turned down the volume quite frankly because his words were so measured and cautious that anything he said meant very little. Quite frankly, it caused me to get drowsy on a Friday morning. 

The key takeaway was this:  They plan on sticking to the 2% inflation mandate no matter what despite many experts claiming that 3% is an acceptable outcome.   This means at least one more rate hike if not two into the end of the year.   The market is largely pricing that in, which is why we had such a lackluster day on Friday and not much of a rebound at all in the markets this week.

So unless we get some good economic catalyst this week we are pretty much looking at what I expected: Sideways to possible down.  The final week of the summer tends to be boring and I believe that this week will be no different.   We will likely get more sideways action than we bargain for and going into September and mid-october we should see more volatility and perhaps at that point a push to the downside.   

This is not me predicting the future but rather just pointing out the seasonality pattern of the next 6 weeks which tends to be the worst performance in overall markets out of the entire year, historically speaking.

So where does that leave us?  Since we managed to not test the lows that were put in last week, there is no clear downtrend intact right now. This basically means I will be adding lots of sideways trades until a direction is chosen by the market.   I certainly won’t be trying to pick one ahead of time! 

Sideways is an often overlooked strategy especially among Equity Traders. For options Traders it can make up half of their year while we wait for a clear direction to unfold. A good example is MAS (see below),  which has been basing for quite some time now. If markets continue to be range bound I anticipate that Trend to continue.   

What’s great about sideways strategies like butterflies is that you are simply running out the clock while a stock does nothing, and you sit back and get paid to watch!  

Your risk is limited to the net cost of the three-leg contracts, which makes them relatively inexpensive. Options trading might be the only job in history that allows you to get paid to do nothing but simply wait for time to go by. 

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