ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Monday, May 2nd, 2022. I'm Ash Bennington, joined today by Dave Floyd, founder of Aspen Trading. Dave, it's a great day to have you on the show, whiplash trading sessions in US equities happening today. We got a 3% print on US 10Y Treasury yields. Looks like everything closed out the day positive, but what a roller coaster getting there. Dave, you trade these markets. What are you seeing? What are you thinking right now?
DAVID FLOYD: Wow, it's a loaded question, Ash, but good to be back. Good to see you. Like I said to you before we came on camera, I don't think I've seen an S&P session quite like this, either in a long time, or ever, and not in terms of the volatility, but maybe they're the characteristics under the hood.
The volatility was insane. Literally right out of the gate this morning, we had massive moves up, massive moves back down, that took out the lows of the day to make new lows. Then lo and behold, we've rallied all the way back to close positive on the day. If you're a trader, insane opportunities, insane opportunities, albeit you needed to be nimble.
Brian and I were talking even before we get on as well, and he was saying, what's going on here? Again, it's this lack of liquidity in the S&P, so it doesn't mean you can't get orders done. But the number of bids and offers in the market is pretty minimal. It doesn't take a whole lot of selling or buying to move the market up really quickly, and then move it back down.
ASH BENNINGTON: Like the idea of market depth, you've got a very thinly traded market--
DAVID FLOYD: That's the better word to use. Exactly. There is no depth to the market depth right now. It's really bizarre, but it's been like that for a long time. It's just getting accentuated right now. In fact, at the Real Vision Macro Conference, I was talking to Mike Green about this because he was the one couple of years ago that started talking about the way the structure of the market is this lack of liquidity or this lack of market depth, he thinks it's going to continue.
For traders like myself, I welcome it. Yeah, it has its pitfalls. Every once in a while, you get your hand slapped pretty badly, but to get 60 or 70 point moves in the S&Ps in under a half an hour, it's insane. For investors, they got to start coming to grips with the fact that if that market structure and lack of depth continues, you're going to have to plan for a little bit more durability in your portfolio.
ASH BENNINGTON: Yeah, by the way, we should say S&P 500, lowest levels of 2022 earlier today, and NASDAQ also, look, we're up 200 points on the day at 1.38. NASDAQ closing at 12,536. That's up one 1.63% on the day, o n this whiplash day when we saw that early capitulation.
DAVID FLOYD: The one thing I'll add that I think actually from my perspective, based on what I look at, I think the real trigger for us to get the reversal early in the morning, we got the move lower out of the gate. Then right around 6:45 West Coast time, 9:45 back on the East, we had that big rally up, and then we had that big rally up off the lows of the day.
Those both came in when the VIX reversed. I had the VIX futures at 3289, big, big resistance level that it hit twice today. Each time it hit that level, that's what sent the S&Ps higher. A lot of people are getting all excited about the volatility and the VIX is going to go higher and higher. People need to remember the VIX is a mean reverting instrument.
It can stay in the 30s but usually very briefly, if you look at a long-term chart of it, the spikes up into the 30s, low 30s, mid 30s, they don't last long. Selling volatility into that, which is something else I did today. I sold some call spreads on the VIX to take advantage of that. Because, yes, we might stay--
ASH BENNINGTON: Unpack that trade for people because it's a really interesting one.
DAVID FLOYD: Unpack the dynamics of that in terms of what that means?
ASH BENNINGTON: Yeah, just the mechanics of how the trade works to sell volatility.
DAVID FLOYD: Sure, yeah. It's pretty straightforward. You're using an options contract, but the general premise is this. If you look at the VIX, it tends to be a mean reverting instrument, meaning that spikes up, certainly, and spikes down to a lesser extent, tend to be followed by some retracement of that move. When you get these big volatility spikes up in the VIX, historically, they don't stay there very long. Prices migrate back down or what one would call mean reversion.
When those spikes happen, because the price is pumped up. Now, I'm not going to sell these things naked because I think that's a really dangerous strategy or potentially. All I simply did was sell a call spread. Calls were bid up in price because of the volatility.
I sold the call spread, collected the premium and hoping to buy it back at a lower price because most of that premium is going to get sucked out of that options price if and when and the VIX has already started to come in. Prices have already started to collapse. Now, I've got time and price in my favor. I already collected basically the high of the day in terms of the premium.
All I need now for the next couple of months is for the market to go sideways or of sideways to down and I'll end up keeping a chunk of that premium. You usually don't get all of it, but you'll catch capture a fairly decent amount if time and price move in your favor.
ASH BENNINGTON: Yeah, and Dave, to your point, VIX off 4% on the day right now looks like close to 33.1 on my screen.
DAVID FLOYD: Yep. So far, a good trade. Again, something happens overnight. Putin launched a nuke or something stupid, the VIX can go fly and right back up. But normally, absent some exogenous event, the markets seem to carve out a pretty meaningful low today. Who knows? If it stays that way, the VIX will probably come in over the next few days, next few weeks.
ASH BENNINGTON: Well, in that case, we probably have much bigger problems than call spreads.
DAVID FLOYD: Exactly. That's the least thing I'll be worried about, but that's also the reason you don't want to sell those puts naked because there's something really disastrous did happen, you have unlimited risk. I'm happy to take the upside cap. I'm also happy to take the downside cap as well. That's the price you pay for trading spreads, you limit everything on both sides, but you go to sleep at night worrying you're not going to get your head ripped off.
ASH BENNINGTON: Dave, explain firstly, the mechanics of that, how you do it. And secondly, what that risk reward profile looks like, how you get capped on the top, capped on the bottom?
DAVID FLOYD: Well, the mechanics of the trade I put on, I'm using the front month VIX futures, and for me, the 32 call made the most sense to sell based on time decay, based on a variety of things. That was the first leg. I'm selling that 32 call and collecting that premium. I'm sorry, 28 call, I apologize, the 28 call, I sold the 28 call.
ASH BENNINGTON: You sell the call, selling the call is selling the right, but not the obligation to buy. It's a short position.
DAVID FLOYD: Short position, I'm expecting that that 28 call is going to be worth less by the time I go to buy it back. Now, to hedge myself, I'm buying a 32 call as well, same month, same instrument, but I'm buying a 32 call. That's going to cost me some money, but I sold the call for more than I bought the 32 call and I keep the difference, which is that premium. That's how I'm hedged.
ASH BENNINGTON: Catch you on the top side, but it also puts a floor under your trade so that you're not naked, you can go and cover if you have to.
DAVID FLOYD: Exactly, exactly. In fact, I've got the trade up over here.
ASH BENNINGTON: Yeah, you're in front of the screen. Let's take a look.
DAVID FLOYD: Well, pull up a chart of the S&Ps right now. Now, the one thing you have to realize, it's a little bit of an asymmetric payoff here. My payoff per contract is $108 and my max risk is basically about $295. You're risking three times more than you're making, and some people may look at that. Why would you want to take that trade?
That is a risk you take, it's asymmetric to the downside, and I'm only going to collect a third of what I'm risking. By and large, when you're selling the premium up at these levels, historically, you're going to capture something on that trade, you're very likely. Again, unless the world blows up tomorrow, the odds of me losing everything on this trade, not losing everything, but losing the maximum amount, is really quite slim.
Now, it really becomes a trade management thing, and this is where it gets a little difficult. It's not just about price moving lower, you need time in your favor, which I do because I'm an options seller, so time is in my favor, I've got that time decay or theta as they call it. As long as those things move in my favor, this trade will be just fine, but I can assure you that I will not hold it till expiration, absent something really amazing to the upside, meaning that the S&Ps are just rallying like there's no tomorrow.
There's going to be a sweet spot in there, and it's usually two to three weeks out before expiration is when you usually want to close these things out bevause there's not much more juice you can take out of them. That's the one thing that people don't realize about options. It's not just simply set it and forget it. You do have to manage it based on volatility, based on time and of course, based on price.
That's where it gets a little tricky. The key thing is of course not overpaying for option and not selling an option that's too cheap. I think I checked most of the boxes on this particular trade today, and we'll see how it plays out over the next few weeks.
ASH BENNINGTON: Yeah, those really are the key variables. When you look at the mathematical models, the so-called Greeks, it can be a little bit complicated, obviously, when you look at those formulas on the page, but you break it down very simply. This is about price. It's about time. It's about volatility.
DAVID FLOYD: Yeah. That's pretty much the ingredients. The key thing you need, though, first, is you've got to come up with an inflection point in the market. It's not just saying, I think volatility is going to dry up over the next week, or let's say the next two months. I think doing these weekly options is, frankly, not really a good use of one's capital. I think you need to be 45 days out or more to hit that sweet spot.
But let's just say you come up with this random thing, you say, you know what, I think volatility is going to decline over the next month. Well, you might be right, but unless there's a catalyst that then allows you to get that premium at the level you want it, let's say you're wanting to sell a call spread, you're one step behind the eight ball, so to speak. For me, today, like I said, 3289 was a big, big level in the VIX futures, and what I can do now, I can actually pull up the VIX swap, I'll put the S&P chart first if the guys back there want to pull that up, or allow me to show the screen?
ASH BENNINGTON: Yeah, let's do it.
DAVID FLOYD: We'll work from two charts, we're going to look at the S&P chart first here, and I've got to put on my glasses, it helps me see better. Sorry to say that. The second move down we have this morning, this red line that I've got right here is just simply saying this is where we put in a low.
Now, when we look up at the VIX chart, we're going to see that price is actually when the S&Ps were carving out this low, the VIX was hitting that resistance level at 3289. That, to me, is an area where I want to start getting long the S&Ps, and/or if I'd been looking to sell that call spread, sell that call spread. I didn't sell the call spread on the first go around, but I did on the second go around later in the day.
From an S&P traders perspective, and I know we're looking at this after the fact, but I can assure you this all unfolded in real time just as I'm talking about it. Once the VIX hit 3289 and chopped around a little bit, you had to be a buyer of the S&Ps, you can keep your stops fairly tight, although fairly tight in this markets, probably 10 points given the way they're moving, but look at the massive move we got. We went from 4111 all the way up to like 4165 in hardly any time.
Then as you said earlier on, we made a new low on the day, but guess where this new low was put in? When the VIX was, again, hitting 3289. Again, I have not seen a move that quick, that ferocious in quite some time. Again, you're combining two markets.
Now, the really awesome trades that happen on occasion is that you get the VIX at a level and you get the S&Ps at a level. I didn't have that today, but I had the VIX at a level that allowed me to go in and navigate longs in the S&Ps. There are times though, when the VIX is at a level, and this here is actually a level. This here is just a frame of reference so that folks at home can see it on their screens.
What was interesting, though, and I want to go back to that depth of market conversation we're having earlier, we had a tremendous amount of buying on this move up here. Tremendous. The bids just kept being refilled. There was nothing on the offers. It was a perfect stair step higher. What was really interesting, though, is that even when this market started to move lower for the first 10, 15 minutes, there was aggressive buyers in there, but they were being overwhelmed by the selling, what you call people placing orders on the bids, which is what I would call aggressive buyers, or they're loading orders onto the books versus just passive selling at the market. Eventually, they get overwhelmed.
ASH BENNINGTON: Dave, you could explain that, the distinction between passive selling and entering these limit orders. Passive selling at market and bidding. Because I think it's something that people probably who are not involved in this level you are struggle to understand a little bit.
DAVID FLOYD: Well, you just hit upon it, the keyword is at the market versus I'm putting in a limit order. I'm on the bid at that price. People that are on the bid at a particular price, they keep adjusting that because they're very bullish, let's say, in this case. They were very bullish on the way up here. They kept raising their bids, raising their bids, you'd see at every level. Each time we traded higher, the bids would follow back up.
Well, when we started trading back lower, those same bids were still there but they kept buying in at lower prices, buying in at lower prices. Oftentimes, what happens when you reverse is those bids just fall away. They didn't fall away today. That's what I would call the "aggressive buyers". They were being overwhelmed by the passive sellers, which is basically market orders, just boom, boom, boom just sell, sell, sell, just getting filled.
For a while, they absorb it, they took a little bit of heat. Then eventually, they just walked away and then-- what I'm saying why this was interesting to me, and anybody watching it at that granular of a level was that this whole move lower initially, was being absorbed by buyers and eventually, they just walked away. They were just like, oh, shoot we thought we had it here.
Again, I'm speculating what people are thinking. Thought we had it here, we rallied off the lows in the day, so let's keep buying, it's probably just a dip, and eventually, they threw in the towel. Then they came back and did the same damn thing on the close, those aggressive buyers just kept on the bid the whole way up. Again, that's more of market dynamics, and I know maybe a lot of viewers, especially, well, swing traders, I should take that back.
Swing traders would do themselves a little bit of justice in watching that type of action because it does give you clues as to what's happening. From an investor standpoint, this is a blip on the radar, probably your eyes are glazing over, but anybody out there short-term trading be it stocks or S&Ps, because stocks take their cues from the S&Ps, this is the stuff that can give you edges. That's what gives you the edge on knowing when to sell the call spread or knowing when to buy the S&Ps or knowing when to stand aside.
You go from very objective technicals to observation mode, which is why I still think a human being has an edge in this market, a computer can't do all that. It's a little bit different.
ASH BENNINGTON: Yeah, it's really interesting. You mentioned this idea that longer term investors aren't necessarily thinking in these terms. A long-term investor is watching this show, they're looking at that and they're going, boy, I'm looking at those green candles around whatever time that is, I can't really see it, it's about two-- I was [?]-
DAVID FLOYD: Yeah, right in the last hour and a half.
ASH BENNINGTON: Around whatever it is, 12:30 or so, around--
DAVID FLOYD: 2:30 New York time, yeah.
ASH BENNINGTON: 2:30 New York time, you see those green candles just stacked back-to-back-to-back as the bid keeps getting a hit, and it keeps getting entered at higher levels as the price rises.
DAVID FLOYD: Yeah, I look at it this way, I also throw it out there as a thought for some people. If you've got somebody who's longer term investing, they're watching their portfolio, they're not doing a whole lot. Watching this stuff can sometimes give you the opportunity to sneak in a trade there. Again, I'm not trying to downplay like, oh, you sneak in a trade, like it's nothing, but that's a massive opportunity right there.