WAR! All the Latest Bellicosity and Bombast! (SPY,C,FB,DIA,IYT)
North Korea, friends. It’s all about North Korea.
What do we mean?
Well, in the first place, you can expect that the news cycle is about to be dominated by that nuclear-tipped maniac, Kim Jong Un and his merry band of scribblers for the next couple of months, as the move toward a full scale erasure of the wicked Northern Kingdom is hatched, plotted and executed.
Already we see signs that, at the very least, the stage is being set for a negotiating turn of the screw the likes of which haven’t been seen since Bold Boy Arnold threatened the entire stickball crew behind P.S. 113 in Brooklyn back in 1931.
Anyhow, we note several new developments in the last few days that we believe will provide the backdrop for a temporary top in the markets and subsequent short-term decline. They’re connected to North Korea, and they’re as follows –
First, the New York Times is reporting on drills to evacuate American citizens from South Korea in the event of a peninsular war. These are drills that have taken place in the past, to be sure, but given the atmosphere of bellicosity between the two nations over the summer, they now take on added meaning.
Next, consider the latest joint military exercises between the U.S. and South Korea, in which, according to the South’s Yonhap News Agency, a U.S. Special Forces ‘Decapitation Team’ has been deployed along with the U.S.S. Ronald Reagan Carrier group. And who’s head is meant to be served up? Hmmm…
Third, China is building a brand new, six-lane highway through a desolately populated province toward its border with North Korea. Commentators have suggested its purpose is to transport weapons to the border in a hurry in the event of a conflict – even to initiate that conflict (!) according to thinkers at the Heritage Institute, whose bright minds believe a race to seize the North’s nuclear arsenal would be inevitable in the event of war.
The Associated Press reports on North Korea’s deputy U.N. ambassador, who recently warned that a full-scale nuclear conflict is inevitable if the U.S. doesn’t tone down its actions and rhetoric. This, after Russia chose to reverse course and apply economic and other sanctions against Pyongyang, closing the circle on all sides against the notorious nation of baby-killers and well-poisoners.
In what might be considered a desperate attempt to sway public opinion away from the U.S., North Korea this week sent balloons toward Seoul with thousands of propaganda leaflets crying – “Death to old lunatic Trump!”. They looked like this –
Finally, consider Rex Tillerson’s latest pronouncement on the matter. Our country’s Secretary of State, who’s leading the diplomatic charge against the NUKEoreans, stated this week that talks will continue “until the first bomb drops.” Bloomberg News asked precisely the same question we did –
And, indeed, is it that inevitable?
Is there no turning back?
Or, as we mentioned above, is it all part of a grand strategy to negotiate the turnover of North Korea’s strategic weapons supply at gun-point?
Hard to tell.
If the Nordiques feel they’ve been backed into a corner and INITIATE a fight, that’s the end. The full brunt of the world’s fury (and not a few devastating explosives) will come raining down upon them.
If they blink, and choose to play palsy-walsy with an obviously superior military and economic constellation of powers that is now arrayed against them, then, again, it’s all over. Peacefully.
The Final Tally
We believe what will ultimately transpire will, of course, be a resurgence of equity buying, regardless of which route is taken. Whether the NKs decide to fight (and get creamed, a la Libya, Iraq, at al.) or negotiate to throw themselves headlong and lovingly into the brotherhood of nations, or even some other option in between, what’s certain is that the markets will cheer the conclusion of the crisis and all will buy hand over fist in a blind rush to celebrate… what?
The successful conclusion of a crisis.
And that should immediately propel the indexes well beyond their current levels, line the pockets of Wall Street’s most savvy operators, and lead to a festival of rejoicing across the land.
North Korea will be the ostensible reason to sell. But the selling will be short-lived.
According to our measure of volatility compression on the VIX, we are presently due for a strong expansion of volatility, i.e., a potentially steep decline in prices.
Have a look –
The likelihood of a decline became manifestly larger after this last Monday’s VIX read of 0.31, among the lowest marks we’ve seen in a quarter century.
Compression days like these generally see strong selling almost directly afterward. And we believe it will come within weeks.
We’ll return in a moment to a trade that plays it, but first we have two open initiatives to examine.
The first was launched two weeks ago in a letter called ICARUS ALTITUDES. There, we urged you to sell the IYT March 16th 190 CALL for $2.90 and use the funds to buy the DIA March 16th 235 CALL for $1.90. Total credit on the trade was $1.00.
Today, the IYT CALL trades for $2.60 and the DIA for $3.65. Buy back the former and sell the latter and you fetch another $1.05 in the process. Adjusted for minimal commissions, that’s a 1267% gain in just two weeks – on nothing spent!
And that’s live, baby.
Last week we offered you a C/FB pairing that also played wonderfully. The letter was called The Scent of Ascent, and the details of the trade were: sell the FB June 15th 145 PUT for $4.85 and buy the C June 15th 72.50 PUT for $4.45, for a total credit of $0.40.
The long C PUT trades for $4.85 and the short FB for $3.95. Sell the former and buy back the latter and you add another $0.90 to your original $0.40. Adjusted for minimal commissions gives you 767% in one week on zero money down.
We’re playing a calendar spread based on the North Korean conflict and the prospect of a quick pullback in the indexes and a bounce to follow.
And we’re using liquid SPY options to execute it.
It goes like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,