The S&P Is 90 Points From 7,000. Nick, Tony, and Jermal Disagree on What Happens Next.

Key Concepts

• Delta: A measure of an option's price sensitivity to changes in the price of the underlying asset. Being "short delta" means profiting from a decline in the market.
• VIX (Volatility Index): A measure of market expectations of near-term volatility.
• Backwardation: A market condition where the current price of an asset is higher than prices for contracts maturing in the future.
• Iron Condor: An options strategy consisting of two puts and two calls, designed to profit from low volatility.
• UVXY: A leveraged exchange-traded product that tracks the volatility of the S&P 500.
• Expected Move: The range of price movement for an asset over a specific timeframe, calculated based on options pricing.

1. Market Overview and Recent Volatility

The speakers discuss the recent "four weeks of craziness" characterized by geopolitical tensions, specifically the closing of the Strait of Hormuz and missile activity, which impacted global oil and fertilizer supply chains.

• Key Data Points: As of February 23rd, the S&P 500 closed at 6875, the VIX at 19.86, and the 10-year yield at 3.95%.
• Current Sentiment: There is a consensus that the "worst is over" for the market, evidenced by the S&P 500 rallying for seven consecutive days and the VIX dropping below 20. However, speakers note that software stocks (e.g., Palantir, Microsoft) are experiencing significant sell-offs, which they describe as a return to "normal" market behavior.

2. Trading Strategies and Positioning

The participants share their personal adjustments to the recent market rally:

• Risk Management: One speaker emphasizes using "alerts" rather than traditional stop-losses to avoid being shaken out of positions during high-volatility swings.
• Portfolio Adjustments:
  • Flattening: One trader has reduced their delta exposure by 70% compared to two days prior, moving to a "flat" position.
  • Shorting: Traders have initiated short positions in energy stocks (CVX, XOM) and sold call spreads on the SPY and QQQ to hedge against the possibility that the current rally does not hold.
  • Volatility Plays: One participant bought UVXY at the close, anticipating that volatility had overshot to the downside.
  • Energy Hedging: A trader remains short oil using iron condors on USO and CL, noting that they would only face trouble if oil prices dropped to the 78 level.

3. Macroeconomic Concerns

Despite the market's resilience, the speakers highlight lingering risks:

• Inflation: The latest CPI report showed inflation above 3%, the highest level in two years.
• Oil Prices: Oil remains elevated above $90/barrel. The speakers argue that if oil prices remain high while the futures curve remains in backwardation, it suggests the market expects a return to normalcy within 3–4 months.
• Geopolitical Narrative: There is skepticism regarding the "all-clear" signal, as the underlying geopolitical conflicts (war) remain unresolved.

4. Notable Quotes

• "I never liked [stop losses]... things can move and they can shake you out of position. So I just like to have alerts." — On risk management philosophy.
• "It’s a very resilient market which is something that we have said every day the last two weeks." — On the market's refusal to sell off despite negative news.
• "I think the worst is over. I don’t think we’re seeing 6400 again in the S&P." — On the market outlook.

5. Synthesis and Conclusion

The discussion highlights a transition from a period of extreme geopolitical-driven volatility to a more "normal" market environment. While the S&P 500 has shown remarkable resilience, traders are cautious, moving toward neutral (flat) delta positions and hedging against potential reversals. The primary takeaway is that while the market has recovered, the underlying macroeconomic issues—specifically persistent inflation and high oil prices—remain unresolved, leading to a "wait-and-see" approach among professional traders. The potential for the S&P 500 to reach 7000 by mid-April is acknowledged as a possibility, though traders remain skeptical of the sustainability of such a move given the current geopolitical climate.