There’s a popular expression on Wall Street: KISS, which stands for, Keep It Simple, Stupid. Amid a torrent of complicated cross currents, it might present the best approach to trading this week’s news.
More catalysts mean more potential for big moves, and if options are cheap they may present the better way to make a directional bet. At the moment, SPDR S&P 500 ETF Trust (SPY) call options look like a better way to be long in this market.
Here’s why:
Let’s start with Treasuries. The 30-year rate is at the highest level in 20 years. This was enough for Treasury Secretary Scott Bessent to try to manipulate the long end of the curve with the “Treasury twist,” buying back longer maturity debt financed with shorter-term debt. That worked for about a day. The 10-year (the rate he looks at most) dipped to roughly 4.64%, then climbed right back, finishing the week at 4.73%. This is the highest of the post-GFC era. Rising discount rates are not just a headache for government finances; they’re a headwind for every long-duration asset. Of course, that cuts both ways. I believe more concrete yield curve manipulation could occur via the Federal Reserve if 10-year yields approach 6%, but others seemingly believe rates won’t get that high. Look at the holders of IEF, for example, the 7-10 year Treasury ETF. Fisher Investments owns nearly 161 million shares, about $15 billion worth. If you share the view that it’s a good idea to own a little duration in your fixed income allocation you may also believe the S&P highs will be reached between now and year-end.
Another potential catalyst?
Nvidia reports Wednesday. It is very hard for this market to do well if Nvidia’s results disappoint; the index’s performance has been carried by AI infrastructure spending, and Nvidia is both its biggest beneficiary, its bellwether, and the largest single constituent. A modest guidance stumble would ripple through semis, hyperscalers, power, and everything else the trade touches, but even if it didn’t, the stock moves markets by itself. Over the past four quarterly earnings releases Nvidia has fallen an average of ~6%, based on its current weight in the S&P and the Nasdaq that translates to a down move of nearly .5% in those two indices. However, after a year’s worth of ho-hum post-earnings price action, this could be the one that reignites the fire. Nvidia is trading at a well below market multiple.
Now we’re also continuing to contend with trade/tariff policy. Talks with Canada have broken down again, with Mark Carney deciding retaliation is set for September 8. According to an article published by Bloomberg, the PM “see[s] little chance of resuming talks with President Trump before the midterm elections.” While we keep falling into traps of our own making, and of course, if Carney is presented with a deal he doesn’t like, the looming midterms provide an obvious pressure point. It’s worth noting that President Trump has also clotheslined shorts based on trade and tariffs. A surprise deal could catch them out again.
Price action is also a bit worrisome. Memory and storage have been the hottest areas of the market. Several names are up several hundred percent, but they have weakened sharply, selling off even after strong results. Sandisk is up more than 570% YTD, but it has fallen nearly 32% since the June highs. Micron is up nearly 240%, but is more than 20% off the highs, as are Seagate and Western Digital, which has fallen almost 40%. Speaking with a fund manager over the weekend, he said, “while the big money has probably been made, could Micron, which is trading at just over 6x forward earnings, trade up to 12x? Why not?”
Despite this, SPY options remain very cheap. Thirty-day at-the-money implied volatility is about 12.6%, which is about the 13th percentile over the past year (and just the 6th percentile YTD, admittedly a modest data series). Whenever you can buy optionality at a reasonable price, you’re not giving up “edge” to the market to reduce your risk.
SPDR S&P 500 ETF Trust (SPY), YTD
The SPY October 775 calls are just 1.2% out-of-the-money with 7 ½ weeks to expiration, and cost $12.15 as of Friday’s close, just 1.6% of the underlying closing price. Those capture Nvidia’s report this week, the September 8 Canadian retaliation date, and the Treasury’s entire buyback window beginning September 9, the September FOMC rate decision, and a host of other potential market-moving catalysts.
If the market extends the gains, one can participate, and if it doesn’t? Little has been risked.
Disclosures: Tidal owns/holds all the securities mentioned in the article
All opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. This content is provided as part of our editorial output for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor.
THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR.
Click here for the full disclaimer.
