Will Yesterday’s Lack Of Conviction In The Stock Market Now Lead To A General Malaise?

While most indices eked out small gains (S&P +0.65%) on Wednesday, one has to wonder what catalyst could vault the S&P index meaningfully above the 960 area, or substantially below 880.

Rotation, rotation. This game of musical chairs is an attempt by HB&B to distract our attention from the away from the important issues at hand. Meanwhile, the orchestrated voice of mainstream media mesmerizes investors with reassuring words about an economy no longer imploding, the discounting mechanism that is the market, a harbinger of better times ahead.

An oddly subdued FOMC afternoon where conflicting crosscurrents caused traders to become gun-shy; more concerned about not losing money rather than aggressively chasing profits. While advancing issues were solidly ahead of decliners for the session, Bulls were unable to capitalize, squandering an opportunity to reclaim upward momentum.

Will yesterday’s lack of conviction now lead to a general malaise?

While we do anticipate wider daily ranges in the weeks ahead, it is most likely that without heavier volume (ie, conviction), intra-day volatility cannot expand. Option market makers are reluctant to raise bids in slow summer trade, quick to lower offers with a holiday just around the corner. For non-professional option traders, then, it is imperative you study implied volatility seasonal patterns. The upshot is that premium buyers always fight an uphill battle, but holding long gamma positions during the summer is rarely profitable.

If you cannot sell naked options outright (due to risk profile or monetary constraints), consider the following points:

• When purchasing options give yourself 90 days or more for the expected move to materialize - the final eight days before an option expires, premium decay (theta) kicks into overdrive.
• Long option strategies during the summer months normally is trading against the odds.
• Buying options 5-8 days before a national holiday normally is overwhelmingly a losing proposition, as market makers “move the clock ahead”, subtracting 7 days in their option simulation models to compensate for traders taking time off, lower volume, and fewer actual trading days in an option cycle.
• Buyers of premium should focus on situations where heavy option volume has already caused implied volatility to rise, or where corporate earnings are due to be reported shortly.
• Consider buying time (calendar) spreads ahead of holidays; short-term options decay quicker than longer-term options, and if volatility expectations rise, the outside month long premium will rise, and the spread will expand.

The bottom line is that the next week or so before the 4th of July may be extra-challenging for swing traders. Day traders may see wider ranges, but conditions probably will remain choppy until the recent range is violated on higher volume.

I don’t like it but it is what it is.

As for my personal situation, I’ll be ok. The mole will not be an issue. A little liquid nitrogen probably did the trick. But, I do need to slow the pace, maybe take a vacation.

Have a great day.

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