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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!