The bears will get what’s theirs… but not soon

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by psytokine_storm

Clearly this rally still has steam, and there aren’t any apparent catalysts on the horizon for a return to the downtrend. Everything that the bears have clung to and hoped for has amounted to a wet fart, leaving them with shitstains in their undies, and worthless puts in their portfolios.

  • The market hasn’t reacted to employment numbers whatsoever, as they can be explained away as a temporary COVID related blip.
  • Earnings season was a shitshow, but Mr. Market didn’t care, as all of the carnage was – say it with me – priced in.
  • The retail mania that was brewing in Jan-Feb has returned, and people have reloaded their powder bags with Trump Buxx.

Being bearish this month is a very bad idea… but eventually the market will have to pay the piper. Fortunately this summer, there will likely be a great opportunity to reenter puts. Although optimal timing may be mid-July, a mid-June entry makes it less likely to miss the put train to Tendie-Town.

Over the upcoming 6 weeks, the vast majority of the US will attempt a “return to normal” in daily life and (at least according to the bull thesis), spending habits. It’s doubtful that consumer behavior will return to what it was pre-COVID, however. These changes in consumption will be reflected in the July earnings season, and also in the BEA’s initial Q2 GDP estimate (released on July 30). Although Q1 numbers have been explained away as COVID (despite most of Q1 not being impacted by the lockdown), market psyche after things have “returned to normal” may not be as tolerant of blood-red Q2 earnings and guidance. These awful numbers (from a quarter which was FAR more heavily impacted by lockdown) may not be “priced in”.

Presently, it seems as though most Americans and investors have the impression that job losses are only temporary, and people will be able to simply go back to their previous job after things reopen. The July and August BLS numbers will likely tell another story. Any residual unemployment in these months will be reflective of sustained job losses. The August numbers will be particularly telling, as these will capture the people who haven’t returned to work even after Trump Buxx have run out.

Right now, options are rather expensive, which makes puts less attractive still. Although the VIX has had a massive downtrend in the past 6 weeks, it’s still quite high historically (over double the “normal” range of 12-15). This means that a speculator has to pay for a considerable amount of Vega when an option is purchased. As the downtrend in VIX (likely) continues, we may see this Vega cost reduce significantly, which will result in considerably cheaper OTM options over the coming weeks. Given the rate of decay from such elevated numbers, it’s quite possible that we see a VIX of 17 within 5 weeks.

The real dark horse will be if we have to shut the country back down. There is no way that this administration will do this unless things have completely gone to hell, similar to what Italy or New York looked like at their worst. It’s unlikely we see this level of spread anytime soon, as lockdown measures are still fairly firmly in place. Roughly 4-6 weeks after reopening, though (aka mid-late June), it’s possible that things are bad enough that Trump has to double back and close back down.

In the meantime… there really isn’t much that bears can look forward to to save them. Maybe there’s some TA bullshit that they can cling to, but from a fundamentals standpoint (or at least how those fundamentals will be spun by the market and interpreted by the retail investor), the cavalry is NOT on the horizon anytime soon. After the middle of next month, though, the bear thesis becomes much stronger, and if one purchases an option that has enough time to truly play out (Nov 2020 puts), the returns may be extreme. Additionally, if the Summer Bear Party doesn’t come to pass, a Nov expiry allows for an early exit, without losing all value in the position. All of the above though would clearly be proven wrong by the end of August, at which time Nov puts would still have a considerable amount of retained Theta value.

TLDR: If we see an ongoing rally in SPY and VIX under 18 before Jun 26, load up on OTM Nov dated puts. I’m anticipating SPY $315. Although I’m cash-gang right now, I expect to sink $100k into 11/20 SPY $305p.

For now, bears, it’s time to abandon ship on your puts.


Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.


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