There’s a popular expression on Wall Street: “KISS.” This stands for “Keep It Simple, Stupid.” Amidst a torrent of complex cross-currents, this week’s news may present the best approach to trading.
More catalysts mean a higher chance of big moves, and if the options are cheap, it may offer a better way to make directional bets. at the moment, SPDR S&P 500 ETF Trust (SPY) Call options look like a better way to go long in this market.
Here’s why:
Let’s start with government bonds. The 30-year interest rate is at its highest level in 20 years. This was enough for Treasury Secretary Scott Bessent to try to manipulate the longer end of the curve with a “Treasury Twist,” which would buy back longer-maturity Treasuries financed with short-term Treasuries. It was effective for about a day. The 10-year, the rate he sees most often, fell to about 4.64%, but quickly rose again to end the week at 4.73%. This is the highest amount since the global financial crisis. Rising discount rates are more than just a headache for government finances. These are headwinds for all long-term assets. Of course, that goes both ways. I think we could see more specific yield curve manipulation through the Fed if the 10-year yield approaches 6%, but some seem to believe rates won’t go that high. See the holders of IEFfor example, a 7-10 year US Treasury ETF. Fisher Investments owns approximately 161 million shares, worth approximately $15 billion. Those who share the idea that it’s a good idea to have a little duration in your fixed income allocation may believe that the S&P’s highs will be reached between now and the end of the year.
Another potential catalyst?
Nvidia I will report on Wednesday. If Nvidia’s performance is disappointing, it will be very difficult for this market to do well. The index’s performance is driven by spending on AI infrastructure, of which NVIDIA is the largest beneficiary, leader, and largest single constituent. A small stumbling block in guidance will ripple through semiconductors, hyperscalers, power, and everything else involved in trading, but even if it doesn’t, stocks will move the market themselves. Over the past four quarterly earnings releases, NVIDIA has lost an average of about 6%. Based on the current weights in the S&P and Nasdaq, these two indexes are down nearly 0.5%. But after a year of post-earnings price action, this could reignite the fire. Nvidia is trading well below its market multiple.
Currently, we also continue to fight over trade and tariff policy. Talks with Canada broke down again, with Prime Minister Mark Carney deciding to take retaliatory action on September 8th. According to a Bloomberg article, the prime minister “sees little chance of resuming talks with President Trump before the midterm elections.” While we continue to fall into the trap of our own making, the impending midterm elections are, of course, an obvious pressure point if Carney is offered a deal he doesn’t like. It’s worth noting that President Trump is also regulating laundry shorts based on trade and tariffs. A surprise deal could force them into the corner again.
I’m also a little concerned about price trends. Memory and storage are the hottest areas in the market. Some stocks are up hundreds of percent, only to be sold off and fall sharply even after strong earnings. sandisk is up more than 570% year-to-date, but is down nearly 32% from its June high. micron It’s up nearly 240% but is still down more than 20% from its highs. seagate and western digitaldown nearly 40%. Speaking to fund managers over the weekend, he said: “Even though they probably made a lot of money, could Micron, which trades at just over 6 times forward earnings, trade up to 12 times forward earnings? Why not?”
Nevertheless, the SPY option is still very cheap. The 30-day at-the-money implied volatility is about 12.6%, which is about the 13th percentile over the past year (and only the 6th percentile year-to-date, which is admittedly a conservative data series). When you can buy options at a reasonable price, you are not giving up your “edge” to the market to reduce your risk.
SPDR S&P 500 ETF Trust (SPY) Year-to-date
The SPY October 775 call is just 1.2% out of the money with seven and a half weeks until expiration, and at $12.15 as of Friday’s close, just 1.6% of its underlying closing price. These capture this week’s NVIDIA report, Canada’s retaliation date on September 8th, the entire Treasury repurchase period starting September 9th, the September FOMC interest rate decision, and many other potential market-moving catalysts.
If the market increases profits, you can participate, but if not? There was little risk.
Disclosure: Tidal owns/holds all securities mentioned in the article.
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