Wait, Not so Fast!

Since hitting the Brexit-induced closing low of 2,000.54 on Monday, the S&P 500 has managed to rally 3%, essentially halving the losses since Thursday.

Small caps, on the other hand, still continue to struggle a bit and are down 50 basis points on the week. While this quick retracement has worked off some of the oversold conditions, we are not convinced that it’s clear sailing from here.

Given all of the contradictory information regarding Brexit, it is hard to believe clarity is within reach. Even if we do believe for a moment that Brexit is behind us, it puts us back into the same place we were before with uncertain global growth, sluggish earnings and a contentious election season ahead.

That said, we believe this relief rally and associated pop in volatility give us an opportunity to sell into it and pick up some income in a choppy market environment. When you receive this alert, sell to open the iShares Russell 2000 ETF (IWM) August $116 calls (IWM160819C00116000) that last traded at $1.42 and expire Aug. 19. In our opinion, selling the call as opposed to buying a put has the better risk/reward profile in this market environment.

As for our remaining positions, it has been a wild couple of days. We remain positioned to benefit from downside volatility and expect it to reappear in the days and weeks ahead. However, should downside volatility not play out immediately, all is not lost. Our portfolio is positioned for both long and short volatility.