Category Archives: SPX

Another Huge VIX Bet

Richy RichBloomberg reported today (here) a $5 Million VIX bet – 40,000 April calls with the VIX at 15.5 – this follows the $6 Million spread I saw in November  (here).

Things are getting interesting.

The trader purchased 40,000 April calls on the VIX with a strike price of 22 for $1.28 each, according to Trade Alert LLC. The bullish volatility bet was the biggest single block of options to change hands on U.S. exchanges, the research firm said. The VIX rose 0.8 percent to 15.54 today.

Investors are positioning for a possible jump in volatility with stocks poised for the biggest annual advance since 2003 after the Federal Reserve refrained from reducing monthly bond purchases. The central bank may begin reducing its $85 billion of monthly bond purchases at its Dec. 17-18 meeting, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, up from 17 percent in a Nov. 8 poll.

“Customers continue to hedge their stock-market risk by buying upside calls in the VIX,” Mark Caffray, who brokers contracts on the index for clients at Chicago-based PTR Inc., said in an interview. “There have been very aggressive customer buyers of VIX calls in March 23, April 24, and today April 22 call strikes,” he said. “We do not expect this activity to subside until a Fed decision on tapering.”

An explanation from ZH which also suits this trade; “everyone remembers the summer very vividly, the last thing anyone wants is to be the last Kool-aid drinker at the centrally-planned party.”

That was fun

There we have it.

The S&P in moderate panic mode on news (presumably) that a budget deal is in the works. So good is bad for another Fed fix. It’s been a long time since we saw such a smooth ride down. I like this chart, look where we stopped, surprise.

ES Chart

For those of you looking at Fib extensions we have a bit more downside. (Or not…) What was so fun (and profitable) about today’s trading was the failure to find 1800 again and then the breakout under 1792.

These opportunities are rare these days, it was a beauty.

ES Chart Levels

The VIX screamed higher 10% to 15.42. This in itself isn’t so extreme, but if the end of the week shows some follow through we’re in for some volatility. Finally!

The other possibility is we’re going to find a range here 1775 -1805. That also offers some interesting possibilities.

Good Trading.

Selling Vol on the radar.

Johnny Cash

Johnny CashI have no explanation for it. Johnny Cash sings in my head. I don’t think his last name has anything to do with it, but I can’t entirely exclude the possibility.

Driving back to Paris on Sunday, I hear The Caretaker on FIP. Last night a friend in New Jersey tells me he’s coincidentally been on a Johnny Cash hokey-sentimental-reunion-tour, pulling out vinyl.

Maybe it’s the classic lines: The beer I had for breakfast wasn’t bad so I had another for dessert, or the holiday arriving, and A Johnny Cash Christmas subliminally starts to leak back into my consciousness.

I’m off track, and that, thanks to Grant Williams, who is growing increasingly frustrated with the state of the Gold Market. Aren’t we all?

His latest TTMYGH is as good as most, even if you’re tired with his fixation on Gold, you’ll learn something from his (what’s the adjective?) latest newsletter. He deconstructs Gold Price fixing. There is little doubt that 2 times per day in London a mini-cartel, with no legal constraints around their ability to trade or share trades, profits handsomely from their insight into forward prices. No manipulation there… He draws a common sense parallel with the London Gold Pool failure in 1967. Worth the read, again.

Besides Johnny Cash and Grant Williams, I’m intrigued today by the weakness in the S&P index. We’re all looking for signs of a top, might this be it? The VIX is creeping upward, and we see crowded Long Nikkei/Short Yen bets. What would a reversal confirmation look like, in a market that’s been climbing for years?

The chart mavens are calling in sick.

Following a $6.7 Million VIX Call Spread

On October 18th Bloomberg published an article (here) about a trader or institution that bought 160,000 February 24 calls and sold February 29 calls (in equal measure).  The open interest today is at 170,000 and the cost for the trader on October 18th was 42 cents per contract or $6.7 Million. I’m following this trade for fun.

It was very likely a hedge against the SPY (or maybe some SPX futures?). Almost 30 days later the pair would trade at about the same price but what’s interesting is to imagine what this trader/institution had on the other side.

Look at the 6 month VIX and SPX chart below.

VIX-SPX-Call Spread

The SPX is up about 50 points since October 18th and the VIX has barely budged from 13. What would the hedge be? Long SPX or short SPX? It’s a call spread so presumably long SPX (remember VIX has a pseudo inverse relationship with the SPX). The hedge will make money as volatility increases and a quick look at the chart above shows strong resistance at 13.

So how many shares of the SPY (or SPX futures) would you own, if you put in place a $6.7 Million hedge? That’s a good question…  But whatever their long position even 30 days later, it looks like a good trade.

 

Using the VIX for Trade Entry Signals

With the popularity of the VIX and VIX futures being overly used as a volatility hedge, I’ve been thinking about the signals it might give for medium term entry or exit points. If you chart the VIX and overlay Bollinger Bands (20,2,SMA) and look at the SPX, you’ll notice something interesting. Remember the VIX is forward-looking. The other indicators are price biased, and historical.

When the VIX breaks over the upper Bollinger band, you’ll see a low point directional change in the SPX. This isn’t a completely new idea, I was at a seminar recently which looked at combining this with Chandelier as a trading strategy. I’m going to just stick with the Bollinger Bands, the VIX and ATR. That’s where I see the most interesting information.

I mention ATR (Average True Range) because the 1 day ATR helps confirm long entry points.

Everything is in the chart below. The long signals look better than the short signals.

VIX SPX Bollinger

Good Trading.

More Downside?

I wasn’t completely blindsided by this pullback, but the head-fake after bouncing off the 50% fib scared me off my short trades. That’s the way it goes. What could have been a beautiful setup falls into the category of live and learn.

Here’s part of the bearish argument; here’s atleast one reason not to jump back in long, yet.

  1. Rising Historical Volatility – the last 3 times we passed this HV level there was more downside.
  2. Testing the 50% Fib, again
  3. The upward channel works until 1600.
  4. That 1600 falls at the 23.6% fib

S&P 500 Futures ChartI’m expecting some churn here, we’ll see.

Good Trading.

 

Calvin Screaming

Market Manipulation

Calvin ScreamingEvery so often I get thinking about The Manipulated Market. When markets defy logic to such an extreme degree only one of two explanations is possible. 1) Either your understanding of the forces that move markets is so fundamentally flawed that migrant farm work might be more rewarding; or 2) forces are at work which neither the press, bloggers, twitterers, or even Ben Bernanke have the courage to ‘expose’, question, criticize, regulate, or remotely ‘deal with’.

To Big To Fail = Big Enough To Manipulate.

We’re living through a sort of post 9/11 self-reflection while at the same time struggling with the contradictions of rising ‘wealth’ and shrinking disposable income. Capitalism is taking a hit, privacy is taking a hit, and the free market altar seems to be experiencing Alzheimers under stimulus ad infinitum. Some traders make every effort to avoid any and all ‘macro’ inputs to their trading strategy and focus only on: charts, price action, measurable ratios, divergences, volatility, etc. etc. etc. Those traders, presumably investment bank equity desks, and your friendly neighborhood algo are doing well… Very well.

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