Happy New Years

There goes another year! I want to wish every one a safe and happy New years!

Vega

Like most people that have had on long Vega trades during this volatility crush, got whacked. I did really well with my double diagonal, but my calendar that I still have on is looking pretty beat. I adjusted it and all the $RUT did was move higher, with volatility moving lower. Today is my line in the sand; if we get a few more points of “pressure” on my spread I will be tempted to peel it off.

The $VIX did it, it traded into the teens, and this is giving individuals the confidence to allocate more of their hard earned money into the equity market. But I think that IV and the $VIX has bottomed out for now. I think the $VIX could pop to 22 with no problem, and fall back into the teens. I read yesterday that Goldman Sachs as 6 trade ideas for 2010 and the #1 trade was short volatility. Now for most short volatility is a complicated concept, but if Goldman thinks volatility is going to get even lower long equity is going to be a great trade. Even long premium would make sense to me.

Have a happy holiday everyone

Iron Condor

I set something similar to this trade below today.

Slow Week

Its Christmas week and volumes are low and the action yesterday was fast in the first hour then slowed down. I really don’t expect the volume to be explosive or price action to move too much.

Yesterday the $SPX momentarily broke the top of the range I’ve been talking about. It looks like we closed on resistance or just slightly above it. All that means to me is that we have a higher probability of pulling back. Also the $VIX is extremely low considering where it’s been, now my thoughts were for a $VIX in the teens by the year end. That could still happen, but when we get down here setting long Vega trades just seems right.

Yesterday I cleaned up some of the positions in my portfolio, including my double diagonal and iron condor. I also am setting credits and debits on the $RUT, $SPX and $NDX. As of now I have not set any short call credits, I think I will be able to get more premium out of the calls later in to this cycle.

Spread Update

With today’s pullback I was able to close out my $SPX butterfly for +13.86%. I would normally wait to close a butterfly out, but with low liquidity I pulled the trigger a little earlier then I normally would have. I still have my double diagonal on, and my calendar on, which have not been performing as well as they normally do, because of the long Vega portion of the spread. Since today vol is popping a bit, it’s really helping out my double diagonal and calendar. I will be patient and continue to manage my risk with those spreads.

Thoughts

Yesterday the S&P 500 had its highest close of the year. As the indices edge higher, so does the dollar. I believe that this correlation is starting to break down. The dollar has been moving higher off the November bottom 74.21 now trading at 77.35, that a 4.43% rise in the dollar. I think the dollar has some more room to run, but could come up to some over head resistance at 77.74, and it might have a slight pull back at that number, but I believe it will cut right through.

The S&P 500 $SPX has been a great vehicle to trade delta neutral this month, the range has been tight and IV is falling off a cliff. I still think that the S&P year end will be 1120-1125, and the $VIX could have a chance of trading in the teens. Technically the chart is not doing much, not much to report on, except the sideways action.

Income trades are working very well in this tight range market, I plan on closing some of them today. This was also the first month ever where I traded $MNX the mini Nasdaq in a double diagonal, and I will continue to trade the $MNX. Now, I have been trading the $NDX, and you can get in trouble very quickly and have more money in a trade because of the 25 point wide strikes. It’s cheaper to trade the $MNX and the chart and components are the same as the $NDX.

BTU Trading Idea

As I was scanning through some charts today, I came across Peabody Energy BTU. I have had this stock on my watch list for a while, and I really like how the chart is setting up. Below is a positive Delta trade idea.

Pavarotti Trading Music

Calendar

Today I added a long Vega calendar position to diversify my Greeks a bit.

Hang-Ten

Bring the Pain...

On Friday the big market concern is over the steep rise in the dollar and the rise in the equity market. The reasoning behind the rise in the dollar is due to the better then expected unemployment number. For most people this is not a good correlation, especially for commodities prices. Companies that consume industrial metals or energy to run their business are going to be effected. I think that even the precious metals will get hit the hardest because of the opposite effect a strong dollar will do. But also because I think that most of the precious metals are extremely over bought, and when people start looking for the exit we will get fast covering and locking in profits.

Below is a chart of the dollar index, and of lately we have broken out of the wedge pattern that we have been in for quite some time. We are also approaching and resting on the resistance side of the 50 day moving average. If we break the 50 day moving average and close above, we could see a counter trend rally back in to the 80's. If you take a look at the volume on Friday, you can see all the short covering that went on. I feel like the bears capitulated on the biggest volume I've seen on the $DX. We could be in for a bumpy ride as this carry trade starts to unwind.

Now if we do have a counter trend rally equity and commodity markets are going to be heavily effected in a negative way. I will be getting long Vega on any opportunity, and I will continue to manage my risk with my other positions.

OK One More...

I have one more trade to share with the blog before its too late.

Double Diagonal, $MNX

Another One...

I went ahead and set that iron butterfly I was talking about a few post back.

Iron Butterfly, $SPX

New Trade

New trade that I set today.

Iron Condor, $RUT

Thoughts

The last three candles on the $NDX including today are starting to look like this index could be losing a little steam. I don't see the Nasdaq dropping below 1750 any time soon, more of a channel forming. Same with the $SPX and $RUT, a channel is forming on all of them which make me think that we will not see much action the rest of the year, and I'm OK with that! I still think that we could get a Christmas rally, but no signs of that yet. The reason for this post is to highlight some key charts besides the indices I like, and these all could be short put ideas for Jan.

CME is continuing to look good for a cash secured put.
AAPL today came down and is testing an uptrend line, with this test I think a short put would work out good.

Iron Butterfly

Heres an idea for an income trade for Jan, its an iron butterfly. I would want to get out in about 17 to 20 days. I will probably be setting something like tomorrow or Monday. I feel like Monday would be better to set this trade, because it would be more consistent with my trading plan. Being consistent is a very important thing to me, so Monday will most likely be the day, but if not I'll post the trade when I set it.

Goldman and Guns

Here We Go

Income trades for Jan should start to go on today or tomorrow. Right now the normal spreads that I trade are out of whack right now. Calendars are traded in my portfolio and in one of the accounts that I manage. Since July the skew on $RUT put calendars as been between -.5 to -.9 which is manageable, but skews now are more like -1.77. With such a negative skew, its not worth trading in my opinion. I would rather wait a few days to see what volatility does, and then I will make my decision. Iron butterflies will be put on today or tomorrow. The reason I would wait till tomorrow is because of the big employment number. I would want to see what that number is and to make sure its not disastrous. But more then likely I will place my trade today, and I will post any new position as soon as I can.

ITM Debit

I know a lot of people don't like trading ITM debit spreads, because the deep ITM options are less liquid. And I agree, but the opportunities ITM are pretty sweet. The reasonings behind this strategy are simple, higher probability of profit. The OTM debit verticals should be played in a speculative fashion. Now having a spec portion in your portfolio is perfectly fine, but having a defined probability of 80% or higher is more desirable. Trading ITM debit spreads is not rocket science, but be aware of market direction before placing your position. Another reason I like this trade is the simple yet yield saving adjustments. The adjustment on this type of strategy is easy and after the adjustment is made you are turning it in to a long condor/long iron condor.

Trade Idea: Nasdaq 100 ($NDX)

The $NDX in my opinion is setting up for a move higher, as the 20 day moving average is acting as support. The break even on this trade is 7% lower then current market levels, giving this index room to fluctuate.

Outlook

In the news lately we have all heard about the Dubai "Crisis" the next shoe to drop. Any time I hear the word crisis I automatically think of volatility levels spiking. This time is no different, with thoughts of price movements getting bigger, faster and scarier makes most traders shiver in their boots. More protection will probably be purchased tomorrow driving IV levels higher, now for those that are short Vega this might be a hard thing to watch, but a word of advise, this whole Dubai crisis has hardly anything to do with the USA. Meaning, what happens over the next few days will most likely turn into a buying opportunity.

Last week the $SPX came right down to its support level of 1083 and held. I believe anymore weakness out of the $SPX will result in another pullback of 5-7%. I have on the chart below a uptrend line that I'm calling support, with a test of that line at about 1050-1055 we would be making a higher low. Right now I think anything is possible, but with how low IV levels are and how the dollar is setting up I'm leaning more toured a pullback then higher prices.

The $RUT to me is building a channel and like I said in an earlier post I think the $RUT could stay in that range for the time being. The range is 630-550, but on the other hand the $RUT has not made any significant attempt at making a new high. I will say that I think the $RUT made its high for the year. Now the bears are all over this index due to the lower higher in the pattern, saying that the $RUT is just now starting its down trend. I love to disagree but the bears have a point, for me and a lot of professionals alike, think the small cap sector may have some turbulent waters to face. But will I stop trading it? No, the $RUT will always be a great trading vehicle.

I briefly mentioned IV and volatility levels at the beginning of this post, but to me having a long Vega position on makes sense. When ever IV is incredibly low I get my contrarian helmet on and figure out why there is so much complacency in the market. Most of the time I can't find a reason for the complacency, but rather find a reason to get long volatility. With the word "Crisis" being thrown around like a rag doll and low IV levels throughout the market it just makes sense. Again the $VIX could stay in a range between 20-30 for the next week or so, but I think we will see the $VIX in the teens before the year is over.

Iron Condor

I'm not really a condor guy unless its an iron butterfly, but I found a high probability iron condor trade that I do like. I also closed out my iron butterfly trade for +16.18%, not bad for two weeks.

TEC-9

On the $SPX we are building a sideways channel with support at about 1080. If we do not hold support I think we could see 1060-1070 before we head higher. My thoughts about the seasonality of Thanksgiving and Christmas gives me the believe that we will hold the 1080 level. Implied volatility on the $SPX is very low at about 18.15%, with IV levels that low long vega positions could be set. One trade I have on currently is a long strangle on the IWM. The main reason I have this trade on is to capture any move higher in volatility.

The $RUT is still my favorite of the indices, even though its been under performing. My thought is for it to continue to under perform as funds and money managers buy high dividend, big cap all star stocks. Leaving the small cap stocks weak, but some good could come of this. Since we know the $RUT is the lagger we could pair trade the ETF's that track the $SPX and $RUT. If the market is strong the $RUT will not be as strong and if the market is weak the $RUT is going to be the weakest. Long SPY and short IWM as the pair. As for the chart I think the $RUT could stay in a range for the rest of the year, between 550-625. I think that we could build a base till Feb 2010.
Not much to say about the $VIX, but we are in the lower one third of the range. And we could see a pop, but with my thoughts on the seasonality I think that we might be able to go into the teens. As of now 20 is still support and 28-30 is resistance.
The dollar is still weak and is showing no signs of making a recovery. The dollar is in a falling wedge pattern and as been for a while. Right now the dollar is at the top of the range on the downtrend line, and I think that we could see the dollar fall even more to about 74.25.

Trades

There are a few things that I am thinking about today and holiday theta decay is a big one. Thursday the market is closed Friday is a partial day and we have a nice weekend. Most of the time I try to get my positive theta trades working well before major holiday breaks. This is no exception, I'm setting credits and debit spreads today. I like almost any short put spreads on the $SPX below 990 and below 520 on the $RUT. I will wait to set short call spreads to see if we continue this rally into thanksgiving.

The $RUT calendar I set two weeks ago was taken off for 14.37%. I also added some short puts on AAPL around 180 and I'm looking to sell some more on any weakness. I still have my iron butterfly on the $SPX, shown below in the risk graph.

Volatility is nearing the 20 mark on the $VIX, and I think that we might have a chance this time to break into the teens. The reason I think we might is I'm expecting a rally into Christmas, and another reason for my short AAPL puts.

Other then that I feel bullish on the market till about 1125-1130.

Might Have A Chance

We are having a big up day in the market and the $RUT is above the down trend line I highlighted in an earlier post. A close above this down trend will indicate to me that we might see the $RUT catch up the other indices.

I have a few ideas about what could happen with the $RUT, and most are for more volatility as the index chops around. But one possible scenario is for a head and shoulder pattern. The reason I think that this pattern could form is due to over head resistance as we try to push to new highs. A lot of people just want to break even from last year, and because money is being taken in and out of the market causing us to zig zag into a head and shoulders pattern. Below is a chart of the $RUT.

Will The SHHHH Hit The Fan

The last couple of days in the market have been changing my thoughts and my opinions on where the market will be by the end of the year. The double top that I sold is working well right now, but it might continue to work well over the next month. When looking at the charts the $RUT is the one that really stands out to me. It feels and looks like the trend is changing in the Russell 2000 index, and that could spell disaster for the rest of the market. While the rest of the indices were making double tops the $RUT was making a lower high. The weakness in this index was just confirmed and I will continue to hold my short. My short to median term target on the $RUT as long as we have a continuation is around 555. The 555 level will be taken off the table if the $RUT makes a closing high above the 596, but above 600 would be better.

Positions are still in great shape, I'm long vega and the pop yesterday helped out a lot.

Volatility

Today I will be taking profits on my short puts that I set about a week ago.

In my opinion I think that volatility levels are now back at the bottom of the range. Now is the time to start adding to a long vega positions. I set $RUT calendar spreads yesterday to get some vega exposure. Now the $VIX is at about $22.10 and price could get as low as 20 again and that is alright, but if you want to start looking at long vega positions now is a great time.

There are a few other things that make me feel vol could pop over the next week. The first is the dollar, the greenback is closing in on the bottom of the wedge pattern. The closer the dollar gets to that level the higher the probability of going higher. Also the double top at 1100 is going to effect the vol levels as people will start to buy protective puts just in case we sell off from 1100. With 1100 in the cross hairs the anticipation of a pullback is ever growing.

To recap: Bullish on volatility, slightly bullish to neutral on the dollar, and I think a slight pullback in equity is in order maybe to 1075-1080.

New Trades

This morning I set two new trades, below is the risk profile of both of them.

The dollar is coming into a support area that might trigger a short squeeze, and could make the equity market soft. I would watch the support at 75.05 on the dollar index future, if we bounce we could see a 50% retracement from last resistance. Also I will be selling the market as close as I can to 1100 for a double top pattern or long dollar or long vega would also work.

Jobs

The jobs number came out this morning and it was nothing to write home about. It came in a little worse then expected with a new unemployment rate of 10.2%. Over the recession till now the actual loss of jobs has been improving. I think its more about job creation then less jobs lost this month. Even with this number coming out this morning I still believe 1100 is the next stop.

Below I have two trade ideas.

Wheat has a great chart building and I think a great area is around 501.00 to get long with a call spread of just long the future.

SPX

The last couple of days the SPX has been in my opinion turning. Every time we made a turn in the market the market started to produce small body candles and long wicks. Sideways action is also a key component to this pattern, so it might take a few days for this pattern to play out.

The dollar is a big discussions out there right now, and I think that it is more important then ever. Its important to my trading whether I'm trading wheat or corn futures or trying to predict market direction. Right now I think that the dollar has more down side, with little or no support till 75.10.

I also think that gold has had too big of a move to the upside and should be either shorted via GLD or a long put spread should be set. The candle that formed yesterday on the GLD is very bearish. If you are long GLD you need to have your eyes peeled and keep a tight trail stop on your position.

To recap my thoughts; I'm bullish equity and bearish on the dollar.

Small Hedge

Today is another crazy day and I decided to set the first preliminary hedge. Hopefully the only, but if not I'm ready to protect the portfolio. I like to set hedges that have positive theta, the trade below is on TWM proshare ultra short russell 2000.

Short Put Ideas

In 10 days or so cash secured puts are going to be at the forefront of the strategy calendar. Now I know that we still have 10 days, but with resent market action I expect a rise too and through 1100. And at such a pivotal market level I think that selling puts in tomorrows tape is a safe bet as long as you are okay buying stock at lower levels.

Apple today came down and tested the 20 day moving average, plus it tested an uptrend support at $191.00. Dec 165 puts for 1.25.

Goldman Sachs has a similar pattern, yesterday it tested its uptrend line with continuation higher today. Dec 155 puts for 1.70.
Conoco Phillips had a nice pullback the last few days with a great yield. Dec 48 puts for 1.00.

Market Outlook

Today is a very important day for the equity market. We need to close above 1055 on the $SPX to stay inside our up channel, and currently we are back in the channel. I would like to see this area hold with a continuation to the 20 day moving average currently at 1070. This would make be believe that what we had was just a buying opportunity and not the start of a double dip.

Keep your eye on the dollar as well, if we break to the upside out of the down channel that could cause some panic. My thoughts are that we go lower from here to make a new low.

$$$$

More evidence that the market could be making a reversal.

Is the pullback over?

This market has a lot of momentum to the down side right now, but that could be all over as of today. The struggle between the bulls and bears today is making this market hard to interpret, but this could be a reversal in the makings. The key setup would be if the market closed flat or slightly up, with a continuation higher tomorrow. This would make me believe control has changed hands from the bears to the bulls. If this scenario does not play out 1055 holds strong support on the S&P cash. The $VIX is also something that I am keeping my eye on, with a base of support now at 20 and a resistance point between 25-26.

Russell

Here is the bull and bear argument, the first chart is of the bulls and the second is of the bears. Enjoy!