Category Archives: Option Ideas

End of Cycle?

The contradiction of a rising market and morose sentiment, the Armageddon crowd and the permabull talking heads; where’s a guy to look for some clarity? I’ve been wondering how to get some perspective on the S&P futures market for a few weeks now. I’m not the only one, obviously. We’re all a bit nervous getting long at these levels. A few ideas and a few trades have come to mind. Be patient for a moment while I set the context.

One of the frustrations I have with my trading platform is that its charting implementation is relatively weak. My specific complaint is that I can’t ‘push’ the chart left to sketch scenarios on the right (future). This is constraining for obvious reasons, but please Interactive Brokers I make money on the right side of that chart, you make money on the left. Fair is fair… So I fished around, again, for a charting platform better adapted to prediction and playing with my lines. I was looking for a 3rd party charting platform like Sierra Charts, which in my opinion is weak. TD Ameritrade’s is good and I use it occasionally to visualise option spreads, but I’d rather trade with IB.

I did manage to find something which works for me on tradingview.com. I would prefer something I can manage locally and not web-based, but for quick and dirty chart analysis, as a “brouillon“, it’s very well done. Bravo.

Here’s the chart I’m playing with.

ES 4 year chart

What stands out is the cyclical nature of this bull run. You can see very a fairly consistent cycle after the initial bull reaction in March 2009 – a. I filtered out some of the churn to make my point, but the cycle is still clear.

  • 71 day decline
  • 170 day advance
  • 74 day decline
  • 178 day advance
  • 36 day decline
  • 107 day advance
  • 43 day decline
  • 180 day advance (today)

That’s the time cycle, what about the price range? Well, what jumps out here is the second green bar starting in October 2011 – b, a 534 point advance to about where we are today. (Cloned from the 534 point advance off the 2009 lows.) The second advance, starting in july 2010 – z is a 360 point advance. That move makes me doubt the pull-back I’ve labeled 3 and 4 because it seems to fall between the two, and both 3 and 4 bounced firmly off the 200 DMA,  so under another scenario you might ignore those two pull-backs, but if you don’t the 360 point advance off 3 in May 2012 also brings us near today’s levels. In other words the b and z advance, supports a pullback in the the short term. Assuming that started today, a big assumption, medium term downside targets should be 1517, 1480, 1350. Even if we pulled backed to 1350 on a 100 day cycle, say end of September, we’d still be in a bull market.

Calling a top is a fools game, still I think we’ve a good potential trade here, somewhere…

The objective will be to limit loss on the upside and keep the downside open to atleast 1517. I’ll be back after lunch to share a few trades.

Good Trading.

S&P Futures Chart

SPY S&P Futures – Just Part of the Churn?

S&P Futures ChartWatching the schizophrenic twitter kids, you’d think we’re falling off a cliff today. Maybe today’s the day, but it’s been the same for about 2 weeks now. Risk-on, Risk-off – day in, day out. The momentum looks extra convincing today, or does it? The S&P futures chart is unique in my trading memory. It looks to have doubled-up in volatility, yet look at the VIX, we’re at 13, and holding lows, hardly panic. Option players are counting on the Fed’s steady bond buying. Even Gold is playing along with its consisitent downtrend. No worries, right?

My humble opinion is that the VIX is undervalued here, the 10 year bond has been churning as well, but easing upward. In fact, maybe Bitcoin has just taken over from the VIX as a more appropriate fear index! Parabolic…

If the VIX is undervalued, check out some long straddle’s here, the only caveat is that if this churn continues you’ll get burned, adjust quickly…

Market Sentiment Like We’ve “Never” Seen It

In 1985 I graduated High School, in what at the time, I considered the sticks. In truth suburban Cincinnati wasn’t so far from London, New York, or Paris. Ask Nolwenn Leroy, all types of interesting people pass through Cincinnati.

Me

I’ve found myself in the sticks again, I’ve left Paris for some fresh air and space. I’ve moved to a charming valley, called the Vallée de l’Eure. This change after living in Cincinnati, New York, London, and Paris is refreshing, and exciting. The trading strategies I employ have nothing to do with the stress and noise of Paris, I’m hoping to be more effective here. For those of you who have followed this blog, you’ve seen what’s probably a classic novice trader’s chemin. My interests over the last year have focused on index futures, and option hedges. This year I’ll continue with these products.

A lot has been happening since I last spent a few hours ranting here on Brandnet and I have so many ideas bouncing around in my head that this first post of March risks being incomprehensible, beware.

Here are some of the contradictions that get me thinking:

  • Europe, and it’s place in the world economy – for that matter in my economy…
    • Italy and it’s comedy, specifically
  • Youth, Unemployment, Ambition
    • Subway
  • The media’s handling of politics and the economy
  • Bitcoin, Wealth, distribution
  • Market tempered euphoria
  • Trading strategy

Admittedly the white smoke, the pope, and the historic deconstruction of how Francis will move on 4 wheels takes a certain effort to avoid, but this too will pass, as Vatican punditry fades.

2Paragraphs has a refreshing perspective.

Dow_EURUSDStarting with Europe’s Spring head fake, Europe still hasn’t paid the piper. My last post, Will Europe Find Center Stage (Again)? rings true, still. The economic numbers continue to disappoint and the European markets continue to levitate, following the US markets to recent highs. Ten straight now. The flagrant disconnect in the EURUSD defies logic. Manipulation? Obviously. This divergence is tradeable, but when? You would expect euphoria, and all you sense is apathy, as if the smart money is dumb, and the dumb money is in hibernation.

The founder of Subway, Fred Deluca claims regulation would prohibit the creation of Subway if he tried to start-up today. The spin around this story, puts me in papal avoidance mode, yet the premise strikes a chord. I’m reminded of a grandparent saying how hard they had life, wearing that struggle as a badge of honor. That tale is turned on its head today. In fact life was easy for our Grandparents, or so we’re told. Ambitious youth, educated and indebted face an increasingly difficult journey.

Yet if you compare American youth to their Italian, Spanish, Greek, French and Portuguese brethren who live with nearly insurmountable under employment (though less debt), I have to ask where and when the social impact of this horror will appear on the nightly news. What would our Grandparents say? Or what should we say to our Grandparents?

The EURUSD chart above reflects a manipulated market and a manipulated currency. The ECB and the Federal Reserve are responsable, politicians are complicit, and many argue fully justified. Yet, since we left the gold standard for a fiat currency, currency manipulation, QE or whatever lever central banks choose to employ, is fully accepted as prudent economic theory. The gold standard debate is a can of worms, lets avoid it. But PhD’s assert sans fin, the brilliance behind financial structure, and the strategies employed to manage employment and inflation. That alone raises questions. The simple idea that currency shouldn’t be manipulated by central banks is a powerful idea. Simple = Smart?

Bitcoin is constantly catching my attention, I’m trying to grasp the disruptive potential. I absolutely love the pitch, but struggle to grasp the reality. A recent ‘bug’ caused major stress in the bitcoin market. (here) On the other hand, Argentina’s capital controls are a boon to bitcoin… This  just gets more interesting. My personal experience so far is limited and a ‘wallet’ that just never seems to be synchronised. It’s going to take some work to understand the utility, but the fact that we can buy cupcakes, and trade bitcoin as a unmanipulated currency keeps my attention. (One of my recent posts on Bitcoin.)

Good Trading.

Red Candle

The Mayan Apocalypse Trade: Iron Condor

Red CandleDon’t forget that December 21st is the end of the Mayan calendar and if you’re preoccupied with the apocalypse, light a candle for John Cusack.

In the US, underground shelters and handguns are all the rage as solar disruption should be arriving by Wednesday. In Europe taxi service will be available from a plateau in Bugarach, France. And in China 3 days of darkness is predicted; citizen believers are scrambling for smart-phone batteries and anonymous Sina Weibo accounts.

Consensus is hard to find between continents but among traders, one particular options trade stands out, The Iron Condor.

You won’t get burned on the wings.

VIX Chart - VIX6MO100912

Be Prudent With The VIX At 14

Good Afternoon,

This chart caught my attention. You might see as I do that the VIX is approaching technical resistance between 14.17 and 13.40. This might be a good time to consider a September bear spread.

VIX Chart - VIX6MO100912

The S&P futures are at their highs of the day and highs, post-crisis. I have 1440 on the ES as a short signal. Good Trading.

Why Is The VIX So Weak?

*Update Aug. 16th: FTAlphaville takes my thinking a bit further. (here)

Sometimes I can’t help but wonder.

Watching an obviously weak S&P, I was expecting the VIX to be climbing, but to understand why the VIX is falling it’s worth a refresher on how the VIX functions and wikipedia does a decent job (here).

The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. For example, if the VIX is 15, this represents an expected annualized change of 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down 15%/√12 = 4.33% over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the change in the S&P 500 in 30-days will be less than 4.33% (up or down).

VIX 6 Month Chart
The short answer to this curiosity is: option traders are NOT expecting higher volatility over the next 30 days even with the downturn in the S&P, which often (but not always) signals higher volatility and hence a rising VIX. In other words, option traders are not expecting the S&P to deviate up or down greater than 4.12% over the next 30 days (based on the VIX at 14.23) and that translates to 5.77 points on the S&P and 57 points on the ES.

The VIX and option traders are saying today that the S&P should be bound by 134 and 146 over the next 30 days.

This 6 month chart of the VIX is interesting because at the moment the VIX is low and options are relatively cheap.

I’m often bearish during periods that feel complacent, though traders have a real dilemma with the VIX at 5 year lows and the S&P at 6 month highs. For me the obvious response is reversion to the mean, only time will tell.

CAC40 Chart

Parabolic Draghi

I’ve written before about my frustrations with central bank intervention, and today I’ll write about it again. I just can’t trade on anything but central banker speaking dates. Yesterday, we had a pre-Draghi post-Draghi opening and today we had follow through. Will weekend rumors calm the overexcited? They’ve started already with the WSJ reporting that other ECB board members are a bit surprised by Draghi’s comments and who better than ZH to add fuel to the fire (here).

The best and maybe most actionable information would be this quote:

If the ECB does nothing next week, the markets will tumble.

I tend to agree, yet something other than talk is unlikely, and I can’t deny the markets reaction, so in-the-end who cares if things change or not? Paul Krugman seems to be ok with the status quo (here). With today’s market reaction who could disagree, deficits schmesifts!

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