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The Opportunity Ahead - Key Takeaways From The Current State Of The Equity & Options Market

Updated: May 13

There is a widespread psychological phenomenon that creates a clear bias in perspective - people tend to ascribe individual motives to larger organizations.

Which makes sense when you think about it - most of us have issues with the notion of empathy or, putting yourself in someone else's position. And that is on an individual basis - so trying to put ourselves in the proverbial shoes of larger entities like Institutions becomes exceedingly difficult.

In the case of Retail Investors and Institutions, it hits even closer to home, because both sides actually have the same motive - to make money. However, there is one significant difference that changes everything - the level of certainty.

Institutions want consistent, predictable returns.

Whereas Traders typically are looking for a high return in a short period of time.

The mindset and method behind the two are almost polar opposite. Institutions are constantly balancing and rebalancing their portfolios based on geo-political forces, research on their investments, and economic forecasts.

You have all heard the term - the Market hates uncertainty? That's not true - the market doesn't care about shit - Institutions hate uncertainty. Look at the current situation in the Ukraine - Will Russia invade? What will that lead to? How will it impact Energy Prices and how will that in turn impact the costs of other industries? All of those questions do not have definitive answers. In other words - a great deal of uncertainty surrounds the geo-political variable in their equations.

When we look at VIX - we think of it as a measure of Fear, but what it really should be thought of is a measure of uncertainty.

Why does money flow out of equities into Government Issued Bonds that have a far lower rate of return? Because Institutions are trading higher profits for the certainty of any profit.

They don't like to lose, and they did not amass billions of dollars by taking chances. Not surprisingly, the model works quite well - consider the pattern:

Stock at an all-time high

Uncertainty enters the Market and Institutions unload those Stocks at high prices

Retail traders trying to predict a bottom buy them on any bounce, and then the Algos kick in, unloading another portion of the equity - trapping the retail trader and giving Institutions a higher price on their next round of selling.

Their money goes into low-return, no risk assets as they wait for certainty

Things stabilize and Institutions buy back the very equities they sold off, but at a far cheaper price.

Retail Traders look at the market thinking - "Why won't it go up??" Because we are applying our mindset to the entities that truly move the price - Institutional buying and selling. It is not going up until Institutions feel certain they will get their expected level of profit from it.

The best thing we can do is to use the tools available to us to try and understand where Institutional activity is and where it will be in the future. For example, right now we can see that the current level of uncertainty has the market hovering at major support levels. This typically implies a waiting period - Institutions have various scenarios, and one of them is clearly a break below that support - hence, we hover close to that mark. On the other hand, we have noticed something else - any piece of good news (i.e. signs that their will not be a military conflict in the Ukraine for example), sends the market higher with significant jumps upward. That tells you that Institutions find these prices very attractive, and do not want the sloppy seconds of a more aggressive competitor.

In other words, they are chomping at the bit to buy right now - and do not want to be left behind grabbing equities at higher prices. That desire does not go away, and if we break support due to an escalation in the international conflict, those prices are only going to get more attractive not less. Which means that at a certain point that drop will stabilize as uncertainty begins to turn into reality. At that point there is a lot of capital that needs to be deployed.

Either scenario will offer some of the best buying opportunities you will see in a long time. There are many strategies that one can use to take advantage of that, including the good old fashioned method of just buying stock. Personally I will be loading up on Fig Leafs, buying deep ITM Leaps and selling far OTM calls against them. Swing trading will become very profitable at that time as well, OTM Bullish Put Spreads would be the most conservative approach, Call Debit Spreads will be a very sound approach, and Straight ITM Calls will probably be the most profitable.

The trick here is not to get tricked. That means unlike Institutions you absolutely have to settle for sloppy seconds, or even thirds - As when that bounce occurs, do not worry about missing the first wave, or even the second one - you are still going to have plenty of upside opportunity.


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