Today as the market slipped I noticed that option premiums were not expanding much.  However, I did notice that there were firmer bids for puts.  In a contract where the size is normally 30 contracts bid by 30 ask, I saw the bid ask size edging upward to maybe 60 x 60 or 100 x 100.  I did not see price appreciation.  I saw firmer bids.

This is a good sign and a step in the right direction.

The next step will be wider spreads.  I will start to see the ask on my puts move higher, but not the bid.  At some point, the price pressure downward in the underlying will cause volatility in the name to hit a Tipping Point.  If you have owned premium during times of extreme volatility, you know what happens after the tipping point.  Volatility expands out so quick that all you have is wishful thinking and hindsight and would-a, should-a could-a’s in your head.

Unless you are positioned correctly.

It is then that you can hit it big.

the tipping point

As stated repeatedly, the bearish line on US equities continues. The powers that be are orchestrating quite a little short squeeze. This short squeeze could continue, but it will ultimately fail and we’ll go lower. I seriously doubt that the squeeze will last beyond Friday. I will not be concerned that any long term bottom has been put in until we see volatility expansion. Risk remains high and downside insurance remains cheap.

What am I bullish on? I am bullish on oil here and now.

Me: You know what’s funny?

Me: What?

Me: That in hindsight my dreams always seem so small.

Below is a graphic of the cycle of market psychology.  It is my opinion that we are still in the denial phase.  There are many asset classes that I am bullish on.  Gold and Treasuries are two.  I am not bullish on US equities.  In my view there is more downside to come and we may be only half way through this decline.

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