Sure, markets fell a tad today. But to us, the “what” of market action is never as interesting as the “why,” and given that today was options expiration, we can’t help but think of one word: gamma.

Adam posted some nice thoughts about gamma yesterday (1, 2), and he even seems a little prescient with remarks like this:

…another important point to note about gamma on Expiration Week is that it tends to feed on itself and keep a body in motion.Take this XYZ before. Let’s say it breaks away from 50 on Expiration week and heads towards 55. Call shorts on the 55 line probably had a “mental ripup” option on their books. In other words, a call short that was unhedged, probably on the thinking it was out of play. Well, guess what, now it is a factor. They are likely forced into some sort of action like buying stock into strength, or buying the calls back. Which on the margins adds even more fuel to the stock. Which maybe triggers the next call short into action. Which…… you get the idea.

It’s hard to imagine that today’s move would have had the magnitude that it did if not for the gamma factor. It’s easy to imagine DIA strikes getting shot through as people buy back their short puts or sell the stock throughout the day.

To everyone who whines about commissions and writes in to moan every time we exit a condor before expiration - instead of just letting the things expire - this is exactly why we do that.

 Is the following argument sound?

1. Volatility is not price-agnostic: it tends to decrease when prices go up, and increases when prices go down, generally speaking.
2. So being long (short) volatility has a slightly bearish (bullish) bias.
3. Iron condors are always short vega, which means they are short volatility.
4. // Therefore, iron condors are always implicitly bullish.

Discuss.  Comments are turned on for this one, and we’ll reward any analytic brilliance with a free month’s membership!

The Dow was screaming towards 14,200 today, and several of our members were screaming in pain about the tension in our trades. At the end of the day, the Dow closed down 63 points, the cubes (QQQQ) are off 1.59%, and we’re in a great position for Friday and the weekend. Do you want to know why the markets reversed today? Here’s the only theory (so far) that makes any sense:

1. JPMorgan revised its revenue estimate downward for the coming quarter for Baidu.com (BIDU). The selling kicked in at around 1:15PM. Baidu is a big name for speculative traders, and has become so popular that it seems to have acquired bellweather status a la AAPL, GOOG, RIMM, etc. Adam theorizes that a CNBC observation about the relative magnitude of BIDU’s fall sparked the heavy selling.
2. By 1:50PM, fear spread to the rest of tech, and QQQQ didn’t stop falling until it hit $52.63, which is about where it closed.
3. Tech has been a big market leader for awhile now, a fact we’ve experienced with some firsthand frustration every time we try to throw on a QQQQ condor. Without tech leadership, the rest of the indexes tumbled as well.

Not saying this is the actual cause of today’s reversal, just one that might make some sense. Just because AP, Reuters, Bloomberg et al. are also treating this as the likely scenario doesn’t mean it’s not true, lol. In related news, the VIX closed today at 18.88, up 13.26%. Happy days, we’re ready to look for November trades now.

We write about individual trades and strategies so often it’s easy to sometimes lose sight of the big picture. But macroscopic issues affect us just as much as anybody else, which is why you should read this article from Financial Armageddon, complete with Lou Reed quote.

If you think any of this country’s major financial institutions are much more than modern equivalents of priests, wizards, and two-bit hustlers, you probably just haven’t read enough. Level 3 assets, to extend the metaphor, serve our secular high priests in the same way that the doctrine of transubstantiation served medieval scholastics.

A couple people have written in predicting that markets will roar higher next week. Could be. But these 2-day RSI numbers suggest that uninterrupted exuberance might not necessarily be in the cards. Here are the major indexes:

• DJI - 90.27
• SPX - 95.16
• NDX - 96.80
• RUT - 96.19

And, for those who care, their corresponding ETFs:

• DIA - 91.64
• SPY - 97.75
• QQQQ - 96.42
• IWM - 99.76

As you may already know from our last portfolio review post, we have a couple open positions in IWM, so that 99 handle is a teensy bit reassuring, as these things don’t tend to stay overbought forever.