Markets Like Yellen as Boehner Does the Smart Thing

The best way to summarize the Yellen testimony is steady as she goes.  With stock ripping another 1.2% gain on top of late last week the emerging markets crisis is fading from the headlines.    The daily 20 handle moves in the SPX want a 16% VIX, however, the cash index dropped to the low 14% today.  I think Boehner sealed the deal with a straight vote on the debt ceiling.  Down goes the volatility.

The big sell off started with the retail stocks, then spilled over into the financials and into everything else.  Both of those sectors have a good long way to go.  Retail feels like a dud, so at most it will move sideways without falling off a cliff.  I still can’t help but think, why?  Why the 7% correction in stock prices?

And to be honest, who cares.  Stocks are running again on relatively low volume as a client of ours pointed out to me.  That is not different from a lot of 2013.  What this does do is bring the upside gamma back into play for some individual stocks.  Just look at the leaders and create close to the money backspreads.  When uncertainty fades, the pattern has been for stocks to fly, so look at the fliers.

The Trade

We already liked short volatility and the bigger EM products, so it is time to look at some individual names.  Look at a leader like GOOG and find OTM 1 x 2 ratio call vertical spreads (sell 1/buy 2) for even money or better.  Give yourself a duration of 3 weeks at least and let the money flow back into stocks.