Welcome back to my extremely irregular and inconsistent newsletter. I feel like there is very little great trading content shared around these days so I have decided to try to fix it and will do my best to highlight most interesting data and possible trade ideas each week.
This week, index volatility is sitting at the floor of its yearly range while call skew is sitting at yearly highs, crude is still somewhat interesting to monitor as Trump declared 85th victory over Iran in last four months, and Bitcoin has basically turned into stable coin with one of the lowest volatility readings in its history.
Quick note before we delve in, all the analytics are from Tradingriot.com, you can sign up and get deep historical data for equities, commodities, rates, FX & digital assets which are distilled into daily signals and actionable strategies.
Equities
Volatility in indices is extremely low. SPY is sitting at about 4th percentile of the year, Dow and Russell are basically the same with Nasdaq being slightly higher due to recent tech recovery.
This obviously makes everyone always scream about complacency and possible top, but truth is that it doesn’t have to be this way at all, especially considering the fact that while vol is low, it is not rich which you often find to be the case during peak complacency conditions.
For those of you that don’t know, variance risk premium measures difference between implied and realized volatility, due to how indices trade (staircase up elevator down), you will find out VRP being highly positive during complacency conditions as everyone is feeling safe and writing out puts, but at the moment realized is actually overstating implied vol.
If we look at broad SPX indicators, while VIX is low, it does not show the euphoria levels when looking at Z-score for front against back month, same for credit spreads.
One thing which is slightly unusual and can be seen as caution is the call skew since all indices are the most call-bid they were in the past history. This was caused during the early August rally where puts collapsed as traders sold out of hedges and rotated into upside calls to chase it.
I don't think there is a reason to play a hero and try fading equities despite doom porn always being very popular on social media. Because of that I continue to be long and will mainly monitor 7620 level on SPX for any discretionary decisions.
Systematic portfolio
Now that systematic portfolio is live to follow, I want to spend small part each week to cover recent performance and main allocation.
Portfolio is up 1.4% on the week and 3.45% MTD / 27.06% YTD.
Worth mentioning that while it is outperforming both SPY and QQQ on the year (13.85% / 19.01%), it still has not recovered to prior ATH and is slightly underperforming this month.
This is mostly due to dip in late just as portfolio held leveraged SPY position in SPXL from April to June.
Other than that, positioning is still very much risk on as the core allocation side is mostly exposed to SPY and QQQ with positions also in Dollar and commodities.
Current equity exposure is scattered across more sectors as the monthly rebalancing at beginning of the month diversified from heavily focused tech book.
Single stocks
News wise, market is still dominated mostly by tech and memory names which look to be waking up after summer correction with moves realizing more than implied and call skew bid up.
I found Micron especially interesting this week as there was a large indication of dark pool shorting (which tends to be a bullish signal as flow is coming from market makers filling the buying flows).
With options being relatively cheap at the moment this seems like a decent bet for further upside as long as we are staying above 900.
Futures
After Dollar caught bid on war fears in early June, there was a large rotation in positioning as large speculators started longing DX futures while shorting other currencies.
Despite the fact that Dollar basically retraced since, these positions do not seem to be unwound yet per latest COT filing.
As Dollar is re-entering into the large yearly range, I am most likely going to try and play longs in majors although it is safe to say that currencies have been quite boring and range bound this year (except Yen) so I would not expect any huge trends.
Looking at markets across the board softs and agricultural products have been the main movers in futures over the summer, this is not only caused by shortages of latest conflicts but also severe weather. Sugar rallied heavily earlier this month amid ongoing concerns about a weather-related decline in global sugar production in leading to supply shocks.
While the options repriced this move very quickly, price is sitting at top of the range making an interesting market to monitor for upcoming week.
Crypto
Digital Ponzi schemes are in weird spot, besides max extraction happening onchain, there is really not much interesting going on. If you want to see how bad things really are, on Friday's close the annualized realized volatility in gold was higher than in Bitcoin, something which was unimaginable in the past.
With implied volatility hovering around 30%, this only really happened few times in the past five years and always preceded a large move.
While I posted about this on X at beginning of the month, I had a slight regret shortly after since this is very different case compared to indices for example where buying options and anticipating move makes much more sense since they are actually moving.
For Bitcoin this is not the case. Realized volatility dropped under 20%, which makes options not cheap.
Using my volatility forecast model, you can see that these conditions are very unlikely to remain and buying options 60 days out should turn out to be a profitable endeavor especially if market drops as Bitcoin has negative spot-vol correlation, but at the same time market still can continue just doing nothing while all long vol bets bleed out.
Other than that overall perp market is muted, the main crypto bet still seems to be selling shovels as trading venues such as Hype or Pump continue to perform well. Link has also caught bid this week, god knows why.
Conclusion
I hope you have enjoyed the weekly issues, if you lack understanding some concepts mentioned, make sure to check out the educational course I put together, it's completely free.
Other than that, I will be glad for any feedback and if you want to access data yourself and follow my systematic portfolio, visit Tradingriot.com