A lot of stuff in recent posts has been laying the groundwork for this one. In this post I’ll make my case to backup a number of very ambitious seeming forecasts and hopefully convince you they’re entirely logical and not just hyped up speculations.
Claims I’ll Attempt to Support
We have strong reason to believe are close to a fat tail event.
Decision made at current levels likely a binary event dictating next year’s trend.
Above the last high heavy momentum is highly probable.
There’s a fair case for markets going vertical above last high.
Odds of a crash if markets go vertical is extremely high.
Failure of uptrend around 4200 is highly probable for a crash.
Both bulls and bears are likely to be spectacularly right or wrong at this level.
Conclusion I’ll Attempt to Support
If we’re heading into a fat tail event, the very best types of positions to have are highly speculative deep OTM options.
In most cases a bull thinking we’d make a new high within 6 months would be best to buy calls maybe a bit OTM from the current price of 4400 but 4600 - 4700 would seem aggressive. However, if we take the theory that we might be heading into a fat tail, that it’s a binary outcome and if we’re wrong it crashes it’s totally different.
If we take this thesis we have to take a viewpoint of all the call strikes hit or none of them do. This is why I bought calls about as far OTM as I could. If I am going to get nailed on them I might as well buy the cheapest ones and if the move is going to hit these ones are going to be the most profitable.
The same here would be true of puts. They’re probably going to work or they’re not. If speculating with puts or even if using them to hedge it makes much more sense to go deep OTM. Markets can range and mess about for a long time, so OTM options would need time on them, but they’re be the most optimal for RR.
This is not to say people should aggressively bet on speculative moves. Not at all. It’s not saying YOLO the OTMs. It’s making the case for why it’s worth taking small risks on various long-shot outcomes because we actually have one of the rare instances where this has a good probability of paying out.
Most often IV for SPX/SPY is higher than the real move is going to be. Currently we might be in a time when the IV for the end of this year and next year might be significantly lower than the realised move. So although aggressive trades are speculative - they’re not uncalculated.
Deep OTM options are extremely risky. They’re going to lose at least 80% of the time.
I feel there’s a fair case to made for us perhaps being in the 5-10% of the time that these would be much higher probability and I’ll make that case here, but although I am making a case for them please understand you should only buy OTM options if you’re willing to lose 100% of the money put into them. It happens a lot.
Timing is important.
Here’s why I think we have a chance of timing it.
This post will refer (In some cases extensively) to the following posts. Please read these first:
Could be a critical week for the bear case. (substack.com)
The Case for Exceptional Trends in Years to Come. (substack.com)
Every possible bull trap since 1929. - by HoleyProfit (substack.com)
RUT May Produce Exceptional Opportunities Soon. (substack.com)
One of Three Things is Very Likely to Happen. (substack.com)
All of these posts have elements in them that have been building up to support this piece.
And we’re going to talk about this.
If you do not already see where this is going, you probably have not read all the links.
Let’s get into it.
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