With banks dropping like flies, it looks like Harnett’s (Bank of America) call for a “credit event” has finally come.
But you already had a bailout facility announced over the weekend
Will this be enough to keep from further contagion taking hold?
Could be.
But be wary of the Hero Trade!☟
↓
↓
➠ BUT FIRST
☞ Watch the attached clip from today’s Spotlight to hear more on what’s going on with #thefed and rates markets in the face of banking blowups.
Rates markets are now pricing in a 35% chance of no hikes in March FOMC!
☞ Then go to OI YouTube Channel right now for today’s full Macro Options Spotlight to also see:
• Recap of last week & overnight price action
• Today’s Cross Asset Vol Summary
• $HYG Upside Vol Looking Rich
• HYG #Volatility Dashboard & Trade Idea
↓
↓
➠ DON’T BE A HERO
σ An almost “anti-hero” mentality can be your key to surviving unpredictable markets.
With vols spiking the way they’ve been of late, it’s simply human nature for investors to think they’ve got the magical touch to pinpoint a bottom.
Catch the falling knife. Be a hero.
Unfortunately, the problem is what happens when your hero trades don’t play out in your favor.
You blow up your book…
↓
↓
σ So, thanks to the ongoing crisis in banks, below is a real-world example of how to be opportunistic but with an anti-hero mentality.
An approach that allowed me to survive 20 years in banking without having a spectacular blow-up.
↓
↓
➠ $XLF | BANKING SECTOR ETF (Morningstar)
σ XLF volatility & #skew popped massively.
And our proprietary Strategy Compass flashed SELL PUTS/DO BULLISH RISK REVERSALS…
But that would be suicidal!
Remember, the Strategy Compass is a mean reversion tool at its core.
You must overlay investor discretion.
So why’s it a death wish to try to sell puts or put on bullish risk reversals in XLF right now?
↓
↓
σ You would never want to do that smack dab in the midst of a potential banking crisis & credit event.
Yes, the Fed has come to save the day…
But it only takes a little misstep, change in dynamics, or simply mistiming to wipe out your entire book.
↓
↓
σ Rather than trying to be a hero by nailing directing and timing, you can much more effectively play the normalization in vol & skew by using upside structures.
And you’ll be able to sleep at night!
Something I personally, place a premium on.
But to fade the extreme spike in skew, despite looking super rich (90th percentile), is again a deadly proposition.
↓
↓
σ Statistically, it looks great to be selling XLF #Puts & buying #Calls.
But, once again, if this type of trade were to go wrong, you risk your entire portfolio.
Especially if you didn’t prioritize proper sizing when you first put on the trade.
↓
↓
σ Avoiding the temptation to be a hero is pivotal.
Avoid getting sucked into the mindset of “there’s no way it can drop anymore.”
This is a trap.
Nothing is definite, price can always keep going.
You must accept that you don’t know what’s going to happen.
Anything is possible.
↓
↓
σ Expect the unexpected.
Always search for safer ways to express the view you want to play.
This approach led us to recommend subs (last Friday) use Call Ladders on #XLF if looking to go long on potentially overblown bank fears.
A much safer way to play that view that capitalizes on the vol dislocations occurring all over the place.
↓
↓
➠ BOTTOM LINE
Don’t. Be. A. Hero.
σ
σ
σ
➠ Do you want to capitalize on our professional macro options trade ideas sent to subs daily?
You’re in luck.
You can get a free month of everything Options Insight has to offer right now.
Just use the code in my Twitter Bio, then enter code RV2023 at checkout.
σ
σ
σ
➠ What do you think about my “anti-hero” mentality to markets?
➠ How about your thoughts on what’s going on with these banks?
Let me know in the comments!
Cheers!
