Macro Wrap – Chart of SPX Futures Mini-Crash

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When Speaker Boehner announced yesterday evening, around 8:00 pm EST, that there would be no vote on “Plan B” for the fiscal cliff, SPX futures took a quick nose-dive.  Here is the one-week chart:

 

 

I went back and looked at the minute-by-minute trading around 8:20 pm EST, and the move from 1420 to 1392 and back to around 1420 occurred in a few minutes around that time.  It was real trading, but bid/offer moved very wide (10 points wide in some cases), and not too much trading occurred.

However, I bring it up this morning to illustrate the risks inherent in  the current market structure.  We’ve seen these types of fast moves a few times in the past 3 years.  When the macro stakes get raised, as with the fiscal cliff or European worries, liquidity obviously leaves the market, resulting in brief periods of extreme volatility.

The nature of such a market structure is why we are almost never short naked puts on the site.  We have done 1×2 call spreads, but will almost never do 1×2 put spreads or outright short put sales (only put spreads).  Even in markets that have been relatively calm, we’ve seen fast, drastic moves develop in a matter of days.  Outright short put positions can result in exponential losses in such scenarios, wiping away a year’s worth of profits in one week.

As with any type of trading, options traders should be focused as much on the process as the outcome.  Because the outcome be favorable for long periods, but if it’s reached through a faulty process, the trader will eventually be forced to pay the price.

Markets overnight:

  • SPX futures took the brunt of the hit from the setback in fiscal cliff negotiations.  Other global markets and risk indicators actually behaved ok considering the SPX futures move.  Asian markets were down between 0.25 and 1.25% on the day.
  • European stock markets are down less than 1%, with the EuroStoxx only down 0.3%.
  • The dollar and Treasury bonds are both slightly higher, but not big moves in those markets either.  Commodities are mostly higher with the exception of crude oil.
  • Personal Income, Spending, and Durable Goods Orders data released at 8:30 am.  UMich Consumer Confidence out at 9:55 am