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Ms Vega is Here to Stay

Published on July 28, 2010

Ms Vega is Here to Stay

July 28, 2010

Pls allow me introduce you to Ms Vega.

Ms Vega is my personification for Implied Volatility.  As of this writing, there is almost 3% IV difference for SPY ATM options, VIX is at 24, VIX Oct futures are at 30, a 25% difference!! Though nothing is certain in the markets, this skew does indicate that market participants are “unusually uncertain”.

Stock markets are an interesting place as Market participants tend to have a short memory. With a few percent market rally, bears turn into bull and vice versa and most often the reason is “when the facts change, I change too, what do you do sir”?

A lot of technical chartists have turned bullish, Dow Theorist Mr Richard Russell has indicated that both Dow Industrial and Dow Transports have indicated bullish signal by closing above June high. Mr Russell also gave dire warnings and suggested members to tell friends that hard rain is coming, they sell everything and that by the end of this year they won’t recognize America as it appeared to him that it was one of the most predictable and dire market top. Don’t get me wrong, my intentions are not to disrespecting anyone here, but the point I am making is that Mr Market can humble anyone, anytime. Now just because Dow and Transports bettered June High, doesn’t mean we are in a primary Bull market, both of these needs to prove by crossing their April high first before anything meaningful can be concluded, else we are stuck in this sideways zone.

One of my favorite thinker is John Hussman. He doesn’t like what he sees from the economic fundamental perspective. Once ISM Purchasing Manager’s index data drops below 54, it is highly likely that we are about to see double dip. Pls click here to read in details. Another thinker, Bond King, Bill Gross of PIMCO thinks that world is lacking in “aggregate demand” and has not yet adjusted to the new normal. His latest investment outlook discusses the impact that slowing world population will have in the “new normal” environment.

PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success. Try another way, Washington. El-Erian, Sachs and other 21st century policy thinkers have a better way to push the handle.

Pls click here to read the full outlook.

We are in a range 11,250 and 9,600. Unless any of those are gone, we are in a range. We may expect sudden burst of euphoria or panic sell-off but nothing is really being achieved. For option traders, this can be a good thing depending upon how one uses it and what sort of risk management strategy is used. There are lot of option trading strategies that can be used for sideways markets including the most widely followed Iron Condor strategy. Calendars can be tricky unless chose carefully. Though the strategies that worked in traditional markets may not work so well and returns may not be spectacular but I think Option Traders are still probably better placed to benefit from this sideways move.

(If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only)

Until then, keep trading the options way and start to love as I call Mr. Theta and Ms Vega.

Profitable Trading, OP

3 Comments

  • […] participants. Neither bull nor the bears want to take any strong position. As I mentioned earlier, Ms Vega is here to stay for while and it’s better that I start to pay more attention to […]

  • […] you can’t see. Implied volatility is one such force when trading financial markets. I introduced Ms Vega as personification for Implied Volatility. Depending upon which side are you at, Ms Vega can either […]

  • Avatar Rob Hobson says:

    Hi OP,

    I know this varies but could you give me an idea of the number of trades per month go into making up the results posted on your website.

    Also, assuming you are in Singapore and trading the US markets… can you give me an idea of how you manage the time difference. I think the US markets open around 9pm Singapore time, right? In Australia the US markets open around 11:00/11:30pm which is a bit of a challenge when maintaining a regular job.
    Outside of your trade recommendations, I am really more interested in the education of trading options. Could you give me an idea any education you may be able to provide around trade adjustments, volatility/skew etc.

    Kind regards,

    Rob

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