There is a pattern beginning to shape since the election and for the most part it is not good for equities.? The day before the election was a near time high for stocks and the market has not sniffed that again. The European situation is mostly the same so I don?t think it is there.? The problem is here and what all market participants fear which is the total inaction of the government to get its house in order.? Mind you I don?t think it is a 1250 SPX type problem but more of a slow melt until a resolution and most likely a rally.? The morning economic news is a little brighter each day followed by a steady selloff after any politician opens their mouth.
chart by thinkorswim (www.thinkorswim.com)
Take a look at the XLF (SPDR Financial Sector ETF) since the election.? I am not sure what happened, maybe Dodd-Frank, but on the whole the XLF is down a good chunk.?? The sentiment must be the current administration is not as friendly to banks as the alternative was going to be.? That is fair enough and I don?t see getting back to those near term highs any time soon.
charts by livevol (r) www.livevolpro.com
There has been a steady uptick in both IV and HV for the XLF.? By nature it is not a volatile product except when the financial system is in peril.? I am pretty sure we are past that at this point.? What I do think is we can have a sluggish malaise while the Donkeys and Elephants duke it out.? I think the banks will be caught in the crossfire.? 22% volatility does not sound like a huge sale but I think in this case it is.? Selling the volatility pops in the broader market has been a day trade at best lately so a sale in the Dec cycle should work here as I doubt anything will get solved between now and the 3rd week of December.
The Trade
Sell the XLF Dec 15 Straddle.? I think the near term high is a stretch and the mid-14s is possible given the intraday sentiment while the market figures how high the fiscal cliff really is.? Normally I would not recommend selling a straddle but the XLF is a slower moving product.? Trade this a little smaller than normal size.? The range should be around 14.15 on the downside and 15.85 on the upside so you need to be comfortable in both places.