From: "Ens, Amanda" < To: "Jeffrey E." <[email protected]>, Richard Kahn Cc: "Rothberg, Justin D" Subject: The Fed is Short Strangles - Buy SPX Knock-Out Puts + hedge tech and oil Date: Tue, 20 Jun 2017 14:35:16 +0000 Attachments: GEV1_6.20.2017.pdf I nline-I mages: image004jpg01D2E9A3AAB2EEC0.jpg; image005png0lD2E9A3AAB2EEC0.png; image006jpg01D2E9A3AAB2EEC0.jpg; image007png0ID2E9A3AAB2EEC0.png Let's call a spade a spade. Any attempt (by me, or anyone) to make a case for buying protection in this market constantly seems to be thwarted by a 1% SPX rally immediately following... That said, it's always when everyone's thrown in the towel on a trade that it starts to work. What about the Fed? Some think the Fed's hawkishness last week was tantamount to them disengaging from their traditional "Fed Put" role. Not so, we think. • We think the Fed is very much concerned with normalizing financial conditions both in a bubble, and in a crash scenario. • The only difference now is that they seem to have acknowledged that we are closer to the former (bubble) than the latter (crash). • So they are now effectively short a call AND short a put on the mkt — i.e. they will act to protect risk assets from a dangerous move lower OR higher. • TAKEAWAY — Look at range trade ideas, teeny upside ideas, and carry-effective hedges here. Trade Ideas: 1) Nasdaq/tech hedge: QQQ buy the July 139/129 put spread for $1.45 (ref 140.46). Tech positioning is still overweight, so hedge longs with point spreads to monetize steep skew in the QQQs (lm 90/100 skew is in the 78th %-ile over the last 2 years) 2) Nasdaq cheap upside/long replacement: QQQ buy the Jul 145 calls outright for 39c on a 16d. 3) Oil hedge — Buy USO Sep 8.5/7.5 put spread for 25c. WTI has been in a downtrend, breaking through key $44.09 support. With recent increases in US production, we see further room to run lower in the short term. We also like owning USO vol with 3m ATM implied in the 16th %-i