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Follow My Option Trade

I am starting a new segment on PIO called “Follow My Option Trade”. Each month I will be setting a butterfly spread that you can watch me trade. Every day I will post the risk profile and some commentary.

Monday I will be setting a RUT butterfly slightly bearish, below is an example of what I will be setting. The plan behind this trade is to add butterflies as the RUT moves around, but I will keep you post on adjustments and performance with this butterfly.

Beating the Dead Horse....

I’m going to beat this dead horse a bit and continue to stress a point that is floating around the trading community. This “Melt Up” that we are having on the major indices is not sustainable by any degree, and the real kicker is that we are starting to develop a negative divergence. My short term bearishness has never been so dominate, but as the saying goes “never sell a dull market”.

Trader Eye Candy

Happy St. Patrick's Day

Volatility

I would like to take a minute and talk about the $VIX and the signal it’s signaling. Below is the chart of the $VIX and if you look closely you can see that the last few candles have steadily been on the rise, with the market. That is not a common occurrence and it’s something that needs to be monitored as it may be a signal that this parabolic market is going to stop and breathe. The market may not pullback like we all want, but it may consolidate for a period of time. It almost feels like the $VIX is ready to take off, a coiled spring ready to launch.

Next One...

Today is probably a day to stay very cautious about this market, and we are also headed up yet again. The magic 1,150 number is going to be violated today, making 1,150 the new floor on the market for now. If I had to call the next over head resistance I would say 1,228, which is the 61.8% fibo number. I think 1,228 is an aggressive target for this year, but as we all know anything is possible.

As the market continues to push higher Deltas are getting shorter, one thing that I’m doing this morning is waiting to adjust. I’m waiting for consumer sentiment and to see if the gap traders can push this lower with some momentum that can hold for the whole day. I know that sounds like speculating, but I will only wait until about 9am central. After that I will adjust and cut Deltas.

Point of View...

Sometimes I have to stop and think, holy cow I can’t believe this! The market is on fire right now and I couldn’t feel less bearish about the whole thing. When a market gets parabolic like this I embrace my short Deltas and I am constantly awaiting a pullback to create the text book definition of a trend, a higher low. Right now I have major doubts that this push higher can last without a higher low or some type of consolidation period. I do how ever expect the market to be much higher at the end of the year, so my bearishness is only short term as of now. Below is the ridiculous chart of the $RUT, enjoy!

I'm Back...

I’m back from being a little sick the past few days, and I’m just in time for double diagonals and butterflies. Currently I have a few trades on for April, and I am planning on setting a couple more today. I will be focusing on double diagonals and butterflies, with the double diagonals I will be setting MNX with a long Vega. I don’t think volatility will be going a lot lower, I think higher volatility has a higher probability. And with the butterfly I will be setting that with a slightly bearish tone. Below are the risk profiles of both.

Fibo

Another thing that I wanted to highlight is that we have taken back 50% of the credit crisis; the 50% fib line is at 1,121. A close above this level would make me believe we are headed to the 61.8% of 1,228. When we get up there we will most likely have some hard core overhead supply that will make the market bounce around at the level.

Dollar Vs SPX

I wanted to talk about something that I haven’t talked about in a while, the dollar. The correlation between the equity market and the dollar has not been correlated at all lately. I think that’s because of some deeper economic issue that I’m not qualified to talk about. One thing that I will talk about is a comparison chart of the dollar and the SPX.

Below is a comparison chart of the dollar and SPX.

Looking at the chart the market seems to be very resilient even with the dollar increasing from 74.25 to 81.25 and the market is essentially flat. I think the dollar has a lot more to run especially with all the Euro zone problems. But what does that mean for the equity market? I think more of the same, meaning more sideways action, making it a two sided market. I think the bulls and bears will have great opportunities in the coming months. Since I’m not a bull or a bear in terms of equity direction, I will be a bull and bear when it comes to IV direction and setting spreads accordingly.

Thoughts

Looks like we are going to have a higher open, but one thing to stay cautious about is the low IV. The worst thing about this low IV is that there is not a lot of premium to sell, so if you are selling today sell smart keep your eyes on IV. One situation that I think about when IV gets this low is a pop in IV after you sell premium. That has to be the worst thing about IV this low, if you do get a pop premium prices go through the roof. That is way I always have extra capital so I can deploy more selling at a higher premium price.

Yesterday we broke that channel line and closed above it. My next level that I’m watching is the old high of 1,150.

Good News Neutral Deltas

Last week I wrote a post called “Bad News Bulls”, which I talked about an overhead trend line resistance level that might be creating a new downtrend. I also wrote about an alternative scenario which we would channel out between 1,115 and 1,085. The last scenario of channeling out between those two levels seems to have the higher odds at this point. Today we broke the overhead trend line resistance level and tested the top end of the channel. At this point I will be watching for a violation of the top channel line or bottom support. These are my new levels to watch, if we break one of those levels the situation will be changing.

Winner, Winner, Chicken Dinner

If you saw something on the wing you would be up 5.2%. CLICK HERE TO SEE WHAT I MEAN!

Today is the last day of Feb and spring is around the corner.

Volatility

Before we had this pull back I assumed that the VIX would fluctuate in the teens. I thought eventually we would start tracking the historic tendencies. But yesterday’s move suggested to me that the 20 level on the VIX is likely to be support and 28-30 is likely to be extreme resistance. That is how I will play the volatility going forward, low 20 long Vega, high 28-30 short Vega.

Yesterday’s post was about the overhead downtrend line that is now in place. To go a little further with that, for my opinion to change these criteria need to be met. First, I would like to see a close above the red channel line at the 1,115 level. Second, volumes would have to increase to over one billion positive up/down.

As far as trades go, I have been setting condors for April and I’m still setting credit spreads for March.

Bad News Bulls

The situation that we were in the last two weeks might be getting worse. We have failed to produce a higher high on the SPX, and with that I believe the bears will try to bring this market down. We did however produce a lower high at an over head resistance point, which makes me believe a reasonable target on the $SPX would be 1,010. But there is also another scenario on the table, which is a very choppy market between 1,115 and 1,085. I guess we will just have to wait to see how the market plays out.

SPX Filled

I got filled on my low prob condor about an hour ago and figured I should show it. Have a great weekend everyone!

Condor...SPX

If you have not heard the Fed raised the discount rate yesterday. They want to bring back regular monetary policy; I think this will be a one day event. But with this one day event volatilities are going to be higher and premiums are going to be juiced. I also think this volatility pop we get today will quickly get crushed back down next week, so today I will be selling Vega.

The plan is to sell a low probability condor, below is an idea of what I will be doing. As always I will keep you posted on my actually position.

2/18

Futures this morning are flat with some big economic news coming out this morning. Today we have jobless claims, PPI and our normal gas and petroleum reports.

The VIX is continuing its selloff, which is a good thing for premium sellers. I believe volatility will be more stable then the past two weeks, but I think we will stay above 20 on the VIX. The only thing that seems a bit over done is a market that goes straight up from the Feb lows. The SPX is up 5.5% the RUT is up 7.75% and the NDX is up 6%. I think we need a breather with some sideways actions, at least on the RUT, which is the only index above its 50 day moving average.

It’s almost condor season again for April, as for income trades I will be setting credit spreads next week for March. I gave up on my iron butterfly for March I never get the parameters I was looking for.

Good trading everyone!

There's Something On The Wing!

Going to set some credit spreads today, and wanted to share one that I liked.

SPX and Some Volatility

It really feels and looks like we have made a solid turn in the market, but we still have a few hurdles in our sights to get through. In my opinion we need to see a market that can make a higher high above the 1,150 level. If we cannot make it above that level we could be in the midst of a higher low short covering rally. If that is the case we will find resistance at the 50 day moving average on the $SPX. As we approach the 50 day moving average keep your eye on the $VIX for indication of any push higher in implied volatility.

Income trading this month was tougher than normal, and I had some trouble but nothing too bad. It’s not the last time the market and volatility go crazy while income trades are set. As for March trades I have set everything I could, except my normal iron butterfly position. Normally I look for certain criteria like probability of profit, price, standard deviation etc., but the SPX did not give me what I normally look for. I will give it 2 more days and if my criteria are not hit than I will skip that trade this month.

Thoughts

This morning the futures are pointing to a higher open, but I still believe lower prices are coming. There are a few things that could change my mind and one is if the NDX makes a higher high above the downtrend line that is in place. I would also like to see the SPX close above 1100, and IV to drop back below 20. I don’t expect these things to happen today, so I will be cautious until there is more clarity.

The VIX made a higher low and a higher high, which is not a good sign. I don’t want to see the VIX above 30, but if that happens I think we will head sub 1000 on the SPX.

I have most of my monthly trades set except a butterfly, my criteria have not been met, and until they do I will only manage what I have on.

Lower Prices to Come?

After Fridays candle I was feeling better about the market taking a breather, and possibly going higher. Well, I through that out the window with how today settled up, and my short term target is now the 200 day moving average. Short term resistance is 1070; today we came up and tagged the 1070 level in the S&P and then moved aggressively lower.

Trade Update

On Friday I did get my double diagonal set. Today I will be looking to set a butterfly, but only if the parameters are good. I also have one speculative trade on GLD, a broken wing butterfly. I will post that once I get a fill. And finally I will be setting a MNX calendar, good trading everyone.

Trading Emotions

Yesterday was a brutal day, panic and fear hit the street hard. Despite the emotions on the street I did not set any trade based on the move we had, not because of my emotions. Emotions are sometimes a hard thing to handle when things don’t work out the way you thought, or the thought of uncertainty is a main focus. Fighting the emotion fear is probably the hardest, because let’s face it we don’t want to be wrong. There is one thing that sets the men from the boys and that’s:

“The winners have attained a mind-set-a unique set of attitudes-that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions”

“Traders who make it beyond the threshold of consistency usually experience a great deal of pain both emotional and financial before they acquire the kind of attitude that allows them to functions effectively in the market environment”

Both of the quotes above come from a book that helped me through some emotional times when I first started trading. I over came my trading emotions, and so can you. I recommend "Trading in the Zone" by Mark Douglas. This book is full of inspiration and it will help if you are an emotional trader.

Today the big jobs number is coming out and it will move the market so be prepared for another rocky day if the number is not in line or better.

SPX

Below is an hourly chart of the $SPX, and I believe if we don't bounce from current levels we will see 1050 as our next support area. Currently the old low is acting as a support target.

Weak Open 2/4/2010

Today I will be busy setting and constructing my normal income trades. I will be focused on butterflies and I still have not filled a double diagonal, so I will be working both of those trades.

As for the market I think it all depends on the jobs number tomorrow, if the number is good you can expect the volatility levels to decrease. I have no prediction about the number tomorrow, but I will be watching it closely.

I will update any new trade that I set.

MNX Double Diagonal

New Trade Idea

I will be setting a trade like this sometime during the week.

Charts and More....

Futures this morning are point to a slightly higher open, and it seems that Obama’s speech last night put some optimism back in to investors.

Long term I see a market that will be higher at least making new highs within a few months. Below is a chart of the $RUT on a weekly basis, and the current candle is indicating a reversal back higher. Again the reversal candle is sitting on an uptrend support line swing low. But the only problem I see is that the advancing declining line is showing a negative divergence, with could turn out to be very important, if investors are not willing to buy new highs the markets will crack.

The S&P chart looks as good if not even better than the $RUT chart on a weekly basis. But the same problem occurs; the A/D line is signaling a negative divergence. I would like to see the $SPX close above 1100.

Trade Update RUT Condor

New Trade update

Yesterday I sold an iron condor on NDX, and I think the implied volatility will continue to come out. So I sold premium when I had a chance, and I will keep you updated on this trade.

Russell

Yesterday’s price action was not that convincing, but it wasn’t a slug fest all day so that’s good. The reason yesterday was not convincing of a turn or a bottom is because of the volume. Yesterday’s volume was light, not coming near any volume level we’ve seen in the past as people bought the dip. I would like to see the $SPX close above 1100 and for volume to pick up a bit before I feel confident about this market moving higher.

The $RUT is a totally different story, and I feel more confident about the $RUT right now than any other indices. Yesterday’s price action is very bullish for the $RUT as it created a Doji like candle right on an uptrend support line. If small cap stocks rally the rest of the market will too, but if the $SPX is weak I would guess the $RUT will not be as weak and would most likely outperform in the coming days.

1-2-3

Futures this morning are pointing to a higher open, and a Ross 1-2-3 formation could be in the works to take us back down. Joe Ross is the Yoda of technical analysis, CLICK HERE for the PDF document reviewing the 1-2-3 formation and the Ross Hook.

/ES

I just wanted to give you some insight on what I'm thinking, I have been hearing a lot about the correction scenario and about the buy the dip scenario. I have been talking about the correction scenario for the last few weeks. I think what we are going thru is very healthy and it allows the bears to capture some profits and it allows the bulls to buy at a better price. When I first started to trade the first thing that I learned was things don't just go straight up or down. That everything needs time to breathe and retrace and make lower highs or higher lows.

I believe that this is a buying opportunity, on the chart below is the /ES and I want to highlight the extreme volume at times of panic, and all it does is leads us to higher prices. I think "the pullback into a buying opportunity" is the scenario on the table right now. Watch the 1100 level for that round number support.

Ascending Triangle

The dollar is setting up an ascending triangle, this is a bullish chart pattern, but first we would need to see price come down and test the uptrend line. This could really be a text book setup; if we get a pullback to the uptrend line on down trending volume we could witness a big move in the dollar. Once we get a price break of the horizontal resistance two things should happen (1) volume will break the down trend and we will see a big volume day (2) price has a high probability of retracing back to the top if the pattern, then lifting. If this turns out to be true risk assets are going to be taken to the wood shed.

Chew on this...

The last two days have been pretty intense and we are in the midst of a correction. Now the buzz is that the Obama administration is proposing more regulation on financial institutions to remove risk and cut down on “too big to fail”. It kind of sounds good, but it brings to much uncertainty, and that is way there is fear on Wall Street, just my 2 cents.

Yesterday the S&P broke the sideways channel support, falling to my next support point of 1114. 1114 is a very important place to hold if the bulls want to take back the gains. 1114 is also where the 50 day moving average sits, a break of that would be a sign of further weakness. But I don’t think we will hold, fear is a strong emotion and with a lot of fear in the investment world the odds of a pullback/correction has a higher probability of happening. Especially since traders have been expecting one, profit taking is most likely the case for weakness. This brings me to my next support level, 1085. 1085 is the bottom of the channel made from November 10th 2009 till December 21st 2009. That is also roughly a 5.50% pullback from the 2010 highs. 1085 is not out of the picture yet as a target, but we first need to violate the 50 day moving average.

Also volatility could continue to hit the market, I added to my long Vega trades and will not set any more credit spreads until I think we have touched bottom.

Iron Condor

Trade Update

Yesterday I exited my butter for a profit of 15.75% net. I also exited my double diagonal up 7.28% earlier in the week. So far income trades are working very well, I currently still have my condor on and my calendar on. I will keep you posted on those two trades.

It’s that time again; time to set high prob condors. Below is what I will be setting today.

Credit Spreading

Today I will start the bread and butter portion of my trading, the credit spread. I will be focusing on the $SPX this morning, and moving on to other instruments later in the week. I feel there are dozens of ways to set a credit spread, some people might sell a certain Delta or sell to receive a specific credit. I will normally sell almost anything 10% below the market and 6% above the market. Another way to do this is to sell below support or above resistance or sell 2 standard deviations below and 1 standard deviation above. The ways to do this are countless, but I stick to the percentage rule because I like consistency, but selling 2 standard deviations below the market is about 10% on the $SPX.

Spread Update Time

On January 7^th I set an iron butterfly and received a credit of $32.00, I sold the 1135 and had 45 point wings. Currently this trade is trading at $29.35 that’s a $2.65 profit. Below is the risk profile of my trade.

5 Week

Happy weekend everybody!

S&P finished lower on expiration Friday, and we are about to start one of only a handful of 5 week expiration cycles. Anything can happen in a 5 week cycle, and it feels like traders are going to try and push this thing lower. To make this clear, I am not a directional trader, so I’m not on the sidelines praying for lower tape. I am simply writing how I see it, and I see a retracement to 1115/1120. That’s not a massive move, but it will strengthen the market in the long run.

Currently the market is trading in a tight channel, not much to talk about. Keep your eyes on any violation of either of the channel lines.

Have a great weekend and I will see you on Tuesday.

Angry Broker from CNBC

Thoughts

Resilient, that’s what the market is, and with earning season started, seems like we be more resilient or will we?

Volatility levels are low and indicating a lot of complacency in the equity market, but if theres so much complacency why aren’t people buying? Volumes are low and I think since volumes are low volatility is going to price in the contentment investors are or might be feeling. If investors were as complacent as volatility was suggesting we would see more volume in the market, people buying hand over fist. We all know that’s not happening, but since the credit crisis there is less money to invest, less funds to trade and less confidence from the retail investor. But from July 2009 till now is when the volumes have really started to decrease, and the market was rocking higher at that point. At some point volume will rise and so will the volatility. I still believe that the market is going to continue a sideways slug fest until volumes increase and volatility returns to its normal mean reverting tendencies. Delta neutral trades will still rule the market, at least for the time being.

I will start posting my technical opinion again once the market starts doing something interesting. Until then I will continue to post my trades and any adjustments that might come.

GS Earnings Spec

Most of the time I trade index options, because of the great tax benefits and more premium per contract. I do however watch a handful of stocks and one that I trade actively is Goldman Sachs (GS). Looking at the chart, GS has not done much over the last few months, but IV is starting to rise. Earning are due 1/21/10 before the market opens, and I want to get long Vega. There is two ways I can achieve a speculative long Vega position; long straddle/strangle or calendar spread. After going over the risk and reward I feel like a directional calendar will suit my risk apatite. Picking the direction is a whole different discussion, but I will set it with long Deltas.

One thing I would like to mention is that Meredith Whitney has made only one good call and since she made that one good call she has been some sort of “guru”. I don’t believe she should even be announcing her thoughts or advising investors. I will never listen to that woman and her ridiculous call on GS or any other stupid call she makes on the banking industry. Or just like the “Commodity King” Dennis Gartman, he also only made one good call, but it’s because of that one good call people think he’s a "guru". But really if you listen to him on fast money or any other show, his calls are pretty bad. Whatever he says do the opposite, he even called Warren Buffet an idiot, now that’s down right wrong. So if you are going to listen to anyone, listen to yourself.

Below is the GS trade I will set today.

$RUT

Futures this morning are pointing to a lower open currently trading at 1135 down 7.50. Today could prove to be a great day with a volatility pop. And for all you who like trading by the moon and stars and psychic palm readings I have some pretty good superstitious info. Twice a year my dad goes to Dallas Texas for a trade show for his industry, and twice a year, ever year when he goes the market sells off, he is leaving today. Based on this seasonality the market should start to tick lower. I would NOT trade based on this info, but I thought I would post it for traders that like that sort of thing.

Currently I have on a Feb/March $RUT calendar that I purchased for $8.25 with a short strike of 640. The $RUT is trading around 643.99 and with the pull back that we get today and a volatility increase, this position should look good.

$SPX

The S&P has been up five days in a row, and the probability of a pull back is increasing. When we get this pull back I think that it will be a buying opportunity, a lot of people want to get their money working (especially at a lower price) and I think the pull back will be over just as fast as it started.

IV is not doing much, but the $VIX is well below $20 currently at $18.13. With earning season right around the corner, we could see an increase in IV levels and a long straddle on your stock of choice could turn out to be a great trade.

Currently I have an iron butterfly trade on the $SPX, and I received a $32.00 credit. My short strike is 1135 with 45 point wings. I feel like everyone else (which might be a bad thing) with predicting a sideways market and a low volatility market for 2010. Things could change, but at this time a sideways market makes since to me.

Floored

2010

Well its 2010 and 2009 is dead and gone, and I have a new and improved trading plan that I have been working on since last year. I will still be trading Delta neutral option strategies, but with some small changes. Every trade that I set in my personal account this year I will post, kind of like I have been doing, but with additional info on every trade.

As for the market, we started out this week and New Year very bullish right out of the gate, but everything has its pros and cons. The pro is directional trades are performing very well and a lot of credit is due to the big Mutual funds buying on “Mutual Monday’s”. I don’t think that Mutual Monday’s hold a lot of weight with real market strength. In other words, I think big money is propping up the market with new buying for the year. This brings me to the con, the higher we rise without a pull back or correction, the faster we fall and markets participates will panic. This is the trustiest statement, healthy markets need to stay healthy with pull backs and corrections.

Technically I think the $SPX will pull back, price is resting on an overhead up trend line with limited upside until we pull back.