By Andrew Giovinazzi
As I write this in the preopening hours, I am struck by the old adage “buy the rumor and sell the news.” The pre-election rally was a classic case of that as participants got giddy on some happy outcome. The results are that we have just what we had before without an election for politicians to use as an excuse not to do anything. That is one vote down and one to go.
The austerity and reform choice necessary for Greece to secure aid has a vote today. As of this morning, the downward trace of the euro is not boding well for that vote. Spain is going to hold off on asking for aid, too (the market expected quicker action, I did too), so both things added together make for an uncomfortable brew. That is part of the problem we see this morning.
Normally in this situation, I look for value. Today is a day for good stocks that show good value but are trading at a discount. If readers have noticed some of the past posts (long calls and puts in the /zigman2/quotes/208198139/composite FXE -0.29% , for example, or long a time spread in /zigman2/quotes/203508018/composite MCD +2.59% , I don't look at just direction but the velocity of the direction in picking option trades.
The trend for me is probably lower implied volatilities moving into Thanksgiving, and I will watch today's action closely. If the day ends with a lower VIX then we started with, IV is going to head in the tank. It sounds hard to believe, but a large move is built into current market pricing, and if it does not sustain implied volatility comes in. Mostly I think the short-term movement hinges on the European outcomes.
By watching the action, I will look to add to current positions at better prices. One trend this year that has been solid is the return of housing and financial stocks. I think that trend will continue. One of my favorite plays in this area is selling out of the money put spreads in Wells Fargo /zigman2/quotes/203790192/composite WFC +2.22% in market declines. As long as the market action remains this iffy, I want to keep the trades well away from the ATM strike and I am going to move out to the December cycle.
I would like to wait for news on the Greek election, but after that, one could potentailly sell the WFC Dec. 31/33 put spread for .50 ( risking $1.5 to make .50) or better and watch the market beat around a little. More of the same should continue to benefit the best run bank in the U.S. through the end of the year.
Disclosure: Mr. Giovinazzi has a position in WFC.