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”.

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.

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.

MNX Double Diagonal

New Trade Idea

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

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.

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.

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.

$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.

Calendar

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

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.

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

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.

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.

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.

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.

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.