This post is an excerpt from our August 29th report to Options Insight clients, showcasing how we build our contextual framework to find daily trade ideas. This is a repeatable process aimed at finding high-risk-reward trading opportunities.
The NDX & US 10Y Yields: A Dance of De/Recoupling
Since April, the notable divergence of NDX from US 10Y yields stood as a testament to the allure of AI. However, a shift in July paints a different picture: the NDX aligning again with REAL yields. Notably, post-Jackson Hole, the response in yields has been lackluster, challenging Powell’s “higher for longer” sentiment. A stabilizing or declining real yields scenario from here would bolster strength in US stocks. This potentially heralds a tech revival, particularly given its recent underperformance.
The Nasdaq100 spiked more than 2% right after the publication of the report in line with our view:
The Vol Markets Signal: A Green Light for Risk Rally
We believe that recent vol market behaviour shows positive signs for risk-takers. Indicators like MOVE, VIX, and VVIX have all seen declines over the past week. VVIX’s 20-point dip to its range’s lower-end points to a possible 13-handle on VIX on the horizon. The August shakeout saw discretionary investors tread cautiously, reducing the demand for protection. This trend is clear, given the reduced open interest in VIX upside for September, when contrasted with past months.
Below is the action in the VIX, down over 1%, right after the publication of the report, en-route to the projected 13 handle:
Gold’s Resilience Amidst Macro Shifts
From mid-July, a 4% rise in DXY and a 30bps surge in US 10Y real yields have been juxtaposed against a mere 2% decline in Gold. Gold’s robust performance indicates there is a strong base for potential rallies, given a shift in other macro components. Data on positioning reveals shorts growing in metals. Yet, a recent pivot in China’s policy could instigate short-covering. With this landscape, leveraging the attractive implied volatilities in Gold seems the way to go to harness a trajectory back to its recent highs in the forthcoming months.
Below is the action in Gold, which was catapulted higher from the open. Before, our clients had received the actionable insights:
How We Played The Gold Trade
Historical data on our vol dashboard for GLD reveals that volatility was at a bargain. Although the spot had bounced back to its median range, it’s crucial to recognize the tightness of this range due to the prevailing low realised vol. Such a scenario translates to a positive vol carry. Hence, buying outright options could pose risks when considering theta.
A noteworthy pivot towards calls in skew made us think of the options market’s anticipation of potential upside risks. This perception persisted even in the absence of any substantial upward movement in the spot.
In our assessment, the most effective approach to capitalize on Gold’s potential upside was to invest in 6-month 10 delta upside calls. With the current attractive volatility pricing, there’s room for a repricing surge if a rally gains momentum.
Trade Idea: Long GLD Calls. To find out the [Date] + [Strike], and stay ahead of the curve…
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