SPY / IWM P/L

Last Tuesday and Wednesday I was (as always) warning to beware of the F_E_D knee jerk reaction. I say F_E_D because it's not only on F_O_M_C dates, although primarily, but almost any F_E_D event in which anything that is said can be construed as policy. For whatever reason, whether it's manipulation , for instance say you are a hedge fund manager long with more leverage than you care for and suddenly the F_O_M_C removes "Patience" from their policy statement as feared, but at the same time strike a dovish tone through the rest of the statement even though the ONLY thing that matters in truth is that they just opened the door to the feared June Rate Hike.

The Dovish end of the statement gives the market room to maneuver and in this case as an over-leveraged hedge fund manager with too much long exposure, I need to sell a lot of that and what do large funds need to sell large positions without being taken to the cleaners? They need demand and they need higher prices to sell in to. You might remember about a month or so ago or with NFLX's earnings and our trade set-up there which is now at a 11+% gain (short), I showed some divergences before key events that were going to move the market despite what the outcome of the event/earnings were because in an HFT world, price reaction defines the market's perception of the event. In NFLX's case, if you read through the earnings you realize how horrible they were, but on an +18% gap up the next day, you figure someone must know something more than you and price reaction defines perception.

In NFLX's case just as in the case with F_E_D knee jerk moves, that initial perception gives large funds what they need to get out of what they know was a negative event such as NFLX's earnings...

In NFLX's case we not only knew there was a perception set-up, but knew the earning's stunk and were already looking for the trade set-up with the initial idea to short NFLX at the right time as posted the next day after earnings on January 21st, NFLX trade Set-Up (the gap up day).

At February 26th after being patient for some time, we finally entered NFLX short, Trade Idea: NFLX Short at the red arrow, in fact at the exact high of the entire NFLX run which we suspected back in January was a gap fill attempt to allow middle men trapped with inventory at higher levels at massive losses to get out.

We knew the earnings were horrible and we knew there was a set-up to send NFLX higher no matter what, TO CREATE THE PERCEPTION NEEDED TO SELL THEIR POSITION.

Now looking at the market since the F_O_M_C knee jerk, which we have seen last as short as a few hours and as long as a couple of months, but generally it is retraced within a week. The initial knee jerk reaction is almost always the wrong one and I suspect the above scenario is the reason why.

PRICE IS DECEPTIVE AND THE MARKET MOVES ON PERCEPTION, EVEN WHEN THE REALITY IS FAR FROM WHAT YOU INITIALLY SEE ON THE CHARTS.

This is a chart of all the major averages including Transports since the post F_O_M_C knee jerk, as you can see, nearly all have retraced the knee jerk 5 days later.

Here's the P/L for the just closed SPY/IWM Puts:

At a cost of $3.81 and a fill on the sale of $4.60, the SPY puts came in at a gain of +20.7%

At a cost of $2.51 and a fill on the sale of $2.80, the IWM Puts came in at a gain of +11.5%

Niether of these were the gains I had hoped for (usually around 50%), but now you can see why I prefer to buy quality and more time than I think I'll need, usually about 3x more time. I can always re-open these and will if given the opportunity at a more appropriate strike and expiration.