Depth Charge, Gamma Gravity And A Dark, Twisted Fantasy Come True
Let's take a step back for a moment to ponder where things stand.
The VIX is sitting at a post-February high. Investors are reeling after one of the worst weeks for U.S. equities since the crisis. The U.S. government is shuttered at Christmas in lieu of $5 billion in taxpayer ransom money earmarked for the construction of a 2,000-mile "steel slat barrier" (with spikes on top) along the southern border. The Secretary of Defense has resigned. The President of the United States is under investigat
Although “posthumous equine abuse” isn’t something I’d list under “interests”, Bubba says there ain’t no point in beatin’ a dead horse – ’course, can’t hurt none either.
With stocks when we trade a position 100 with average volatility say 15 we can scale down to 50 if volatility doubles. But with futures it’s not possible, if the average retail trader deals with one e-mini either he trades it or not.
Now with ES at 1400 the notional position was 70k $, but at 3000 it becomes 140k $.
Now add that with a bigger notional position also the volatility increases, it’s unbearable.
Let’s look at it in points: 20pts average daily move implies a stop (I use a rule of thumb here, just for explanation purposes) of say 8 pts, but if the average range is 50-60 pts (we have seen even 80-100 these days) a decent stop should be 20-25 pts equal to 1000-1250$. For the average retail trader it’s probably too much (he should have at least a 100-150k account in order to stand such a loss without too much damage). Logically they stop trading, or if they were trading 2 contracts, now they trade one.
I personally know some traders who used to trade 10 ES in 2017, now they are down to 4-5.
Solution: the CME should split the contract, make it 25$/point, when the ES goes too high.
Another great thing that can reverse the current state of the market would be corporations to stop buybacks and give cash directly to shareholders through dividends.
Buybacks are burning cash and causing losses in a falling market. Apple can be the best company on earth, but if it buys its own stocks at 200 and then they trade at 150, there is no need to beat around the bush: it’s losing money buying at 200 what is worth 150 now. Those are trading losses somehow.
Give that cash to shareholders with dividends, and as the market realizes that the yield is 6-7% it will compare it to the 3% cash/bonds and will switch into stocks again. We don’t care that the earning yield is 7% if 4% is used in buybacks that will turn into a loss. They are destroying value.
The technology is there to make these contracts virtually infinitely divisible.
We don’t care that the earning yield is 7% if 4% is used in buybacks that will turn into a loss. They are destroying value.
This is the whole point, buybacks make only sense when share prices are low, but many CEO’s are so convinced that the share price of their companies is undervalued, while a sensible analysis suggests otherwise, that when they really should consider buybacks, there is no money to do so.
Corporate profits fail to meet market expectations fueled by corporate buybacks. That’s all that need be said. Time to commit to reality.
This worked both ways. I was short AAPL at 208 and got run over to 233. I questioned my analysis, wondered why people are buying at those levels etc. happened to me on AMZN 1850 to 2000. MMM earlier this year 220 to 255 maybe 260. Run over. Lack of liquidity works both ways. The danger on selloffs is that it can bleed into the real economy as layoffs, capex cuts, etc happen. So the numbers change.
My only recourse is time arbitrage. Know I will lose money in the short run and hope my analysis is correct.
I think the way the computers etc trade are insane and not a sustainable business model.
Great piece H
Heisenberg frequently refers to “Other Portals” w/o naming names.
Would somebody else please name them?