Something That Everyone Knows Isn’t Worth Anything — Alex discusses reflexive market dynamics and how this property leads to a pendulum motion from extreme bullish sentiment to extreme bearish sentiment. Using this framework he demonstrates how the bond bear narrative from 2018 was really a false trend.
Option Trading With Darring Johnson — Chris D. speaks with Macro Ops Collective member Darring Johnson. Darrin is an independent trader who specializes in options and volatility. If you want to know how an expert option trader views the market then give this episode a listen. So far it’s been one of our most popular podcasts!
Articles I’m reading —
You Can Now Pay With Cryptocurrency At Whole Foods — Despite the crypto crash, startups have been working behind the scenes to move the technology forward. Cameron and Tyler Winklevoss, founders of crypto exchange Gemini, have gotten a deal together that will allow consumers to pay with crypto on the same scanners that take things like Apple Pay.
I think we need to pay attention to the crypto narrative again. The chart of bitcoin has been moving up and we are starting to see bullish media coverage. Like it or hate it crypto is a great trading market.
The latest Graham & Doddsville letter is out (link here). This quarter’s issue is filled with the usual investment write-ups and interviews, the most notable being their sit down with John Hempton of Bronte Capital (twitter handle: @John_Hempton). Here’s a section from the chat.
G&D: That´s fascinating. How would you describe your investment philosophy?
JH: The first question Kerr Neilson asks on any business is, “What makes you want to own this in the next two years, five years, and ten years?” In my case, it is usually a company that makes a widget that is a small yet important part of a bigger thing, has high switching costs, and has incrementally improved over time. I call this the trifecta. There´s an old saying for this: “There are riches in niches.” Warren Buffett does this all the time. Buffett talks about the six big non-insurance businesses that were about 70- 80% of the non-insurance profits at Berkshire. One of them, International Metalworking Companies, makes tiny cutting tools that go on the end of blades. If you can make a cutting tool that speeds the whole factory up, you can charge a lot of money. You get pricing power from being a small part of the bigger thing, and the switching cost is high because you have to reprogram all the computer-driven blades. IMC has a 45% operating margin, which is almost twice the margin of Apple. It´s an astonishingly good business.
Lastly, stop what you’re doing and read this awesome post from Melting Asphalt on diffusion and networks.
Charts I’m Looking At—
Bitcoin is on a tear…
Bitcoin has rallied over 140% from its 2018 lows which makes it the best performing macro asset of 2019 by a mile. What’s even more impressive is the volume numbers coming in. This rally has had higher volume than the Q4 2017 blow off top. (Volume in gray below) Growing volumes is a great sign for crypto!
Finally, the “alt” coins have taken off as well with increased volume from the 2017 bubble highs.
Chris D., our resident systematic trader, has fired up his crypto trading system again to take advantage of the renewed interest. We are working to push out crypto related trade intel because when these things go into bull markets, there is a lot of volatility and therefore a lot of opportunity for a swing trader.
Nishant, a prop trader in Austin Texas (also the location of the MO HQ), gave a brilliant interview on Aaron Fifield’s Chat With Traders Podcast.
He talks about how the markets have changed over the years since he first started and how many of the edges he initially employed in his trading, no longer work.
He also has a great story about his single largest trading day ever during the August 2015 flash crash. He along with many other traders at the firm earned a seven-figure payday by buying ETFs and stocks that opened up way lower than what the E-mini S&P 500 contract was implying.
That flash crash part starts at 37:25. I’ve heard this story a few times from some of the traders around town here and it’s pretty nuts. Check it out.
Trade I’m Considering —
Whenever VIX trades into the 20s I like to open my dip-buy playbook and pick out the best trade expression I can find.
Elevated vol makes for good premium sells. And I think if VIX can get back up to 20 selling a SPX put spread 60-90 days out for some premium collection is the play.
That should also coincide with a double bottom test in SPX.
I like the out of the money put spread for a few reasons:
We get to take advantage of elevated implied volatility. When VIX rises put premiums become more expensive and shorting fat premiums makes for a good risk/reward.
At worst I see the market in a choppy range bound environment for the next three months. I believe it’s unlikely we see a retest of the Christmas Eve lows when positioning is as neutral as it is currently.
At best we bounce hard and go to new highs.
The put spread should benefit in both scenarios, if the market goes to new highs we’ll collect the full premium of the short put spreads. Should the market chop we still have a chance at collecting all of the premium as long as spot expires above the 2750 level.
Lastly, by selling one put and buying a put further out of the money the trade has capped risk. If VIX goes crazy again and hits 55, we’re protected from an outsized loss.
Quote I’m pondering —
For eighteen years I followed the sea, took what it offered. It has brought me shipwreck and success, sorrow, danger, and unutterable happiness. ~ Henry de Monfreid
Sounds a lot like trading!
That’s it for this week’s macro musings.
If you’re not already, be sure to follow me on Twitter: @TylerHKling. I post my mindless drivel there daily.