- US ADP improved to 217k in Feb vs 180k expected and 187k previously. Small and Medium business again put up strong improvements.
- EU PPI rose 6.1% YoY in Jan vs 5.7% expected and 5.3% previously
- South Korea CPI rose 4.5% YoY in Feb vs 4.3% YoY vs 4.1% previously
- UK PMI Construction improved to 56.6 in Feb vs 52.8 expected and 53.7 previously
- Australia GDP rose 0.7% QoQ in 4Q as expected and 0.2% previously
- As a follow up to yesterday’s comment – note how the S&P has only sold off on days when Oil (in orange, inverted) made new highs, and it rallied as long as oil was stable, a trend that continued today:
This suggests that the balance of risks for stocks over the intermediate term remains positive. This suggests that a trade opportunity is available:
The idea is that given 1) the positive bias for equities, 2) the fact that implied vol for oil is much higher than for stocks, 3) the relationship between stocks and oil has been fairly stable over the past two years, (chart in lower panel is 11 * 2nd WTI contract – SPX Index) we can buy S&P calls financed by selling Oil puts.
Buy 1 June S&P 1325 Call for 32 pts, or $1600, expiry 5/17
Sell 8 June WTI 95 puts for $2.5, or $20,000, expiry 5/20
WTI to SPX notional ratio of 11.5
Net premium of ~$18k. If both options expire at the money, the implied spread would be 11*95-1325 = -280, vs a Median of -250 (meaning Oil prices are usually a bit higher) Selling 90 or 85 strike puts are lower risk versions of this trade, and if you do the 80 strike it will be roughly premium neutral . Selling a smaller number of higher strike options is of course also a possibility.
Basically, this trade bets that if the oil price goes back to levels prevailing at the end of January, the S&P will make new highs. It is more likely that oil prices stabilize somewhere, hopefully not too far from here, as the political risk is likely to recede only slowly, and the S&P makes new highs anyway. This would result in the highest payoff scenario. And if oil prices spike AND the S&P sells off, we still make money by keeping the premium.
Obviously, this trade is subject to conditional correlation risk, so you probably should not put it on in size, but it allows a way to make money in most conceivable scenarios.