It’s not about a bull or bear market, but rather volatility and liquidity. That was the message from Steve Place, founder of Investing with Options, during his 2022 FinTwit Conference presentation on Saturday. The annual event is hosted by Benzinga and Lupton Capital at the ARIA Resort & Casino in Las Vegas.
Place told attendees that keeping a close eye on liquidity can give traders an edge in determining the underlying factors driving the markets.
“Bear market rallies tend to be the most vicious, not just because it’s a lot of people buying, it’s also because there’s just not a lot of liquidity on the ask, and so prices just move massively to the upside, just as they do to the downside,” he said.
Place explained that when volatility drops, the delta drops, which causes dealers to find some way to reduce their short exposure to the market, which can lead to “massive rallies in equities.”
“When you have a VIX that goes from 36 down to 20, you’re going to get a 10 percent rally in the markets,” he said.
Although, the Investing in Options founder pointed out that "it's really weird right now."
"I’m talking this week, the market traded at lows, it’s coming in, it’s looking like it’s about to fall off a cliff," he said. Yet, “the VIX hasn’t fricken budged… I can’t explain that.”
“The VIX has stayed very suppressed,” Place added. “There’s just no panic in the Vol markets as this market is continuing to sell off.”
In terms of strategies, he discussed a few that were “very aggressive.” Some of the approaches for options trading in this environment include a "Put Butterfly into Gamma Squeezes" on liquid names. Especially parabolic meme stocks.
Place also discussed Delta Neutral Long Calls (Synthetic Straddle), and said long calls have better risk/reward than being long on equities right now.
He mentioned the tail wagging relationship in crypto, pointing to the drop in UST causing the implosion of the price of Terra (CYRPTO: LUNA).
One key piece of advice from Place to FinTwit Conference attendees: “If you have a good, profitable trading system, do not screw it up.”