Tag: stock option trading

  • Ms Vega is Here to Stay

    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

  • Where Are We Heading Now?

    Tough Markets, the worst June for Dow since the great depression of early 30s. The Dow is down nearly 9.5%, S&P500 nearly 8%, RUT nearly 5.5% and Nasdaq nearly 7.5% for the month of June so far and we still have one more trading day left. Dow Jones industrial average is down nearly 20% since it’s all time of 14,198 in Mid Oct’07. Clearly we are, at least, in the short term bear markets.

    Goldman Sachs said “Conviction Sell” for Citibank. The most brilliant bankers on the street are saying this “now” when Citibank has already lost 2/3 of its market value since the peak just about a year ago, impressive! Isn’t it? is that what you expect from the top notch professionals to realize this so late, the same guys who were betting against the subprime and made fortunes. I still have a long way to go to learn what goes on the Wallstreet. Even yours truly, on this site, as early as November had openly mentioned his bearish stand on Citibank and to the extent that he doesn’t want to keep much cash there. I talked about CFC, FRE, and FNM when those were still high fliers.

    Coming back to Markets, I am looking at the big picture for both Dow and S&P500 and there are are a few things that I would like to share with you.

    Attached is a 20Year, Monthly chart of Dow. I generally, not necessarily always, look at 12month, 60months and 120month moving average to develop one of the big pictures. As you will notice, Dow briefly touched the 60 months MA @11,300 and is sitting almost there. The previous significant bottom was around 2003 (Just before the Iraq War) and the peak was Oct’07. If we use these two as data points, you will notice that Dow has fallen below 61.8% fib retracement, not a good sign. Another support area, that I consider to be a major support is 50% retracement i.e. 10,697 which is almost in the same vicinity as 120months moving average a very solid support area that has been touched only once in last 20years. Another worrisome part is that MACD monthly histograms have not yet completed it’s cycle and RSI is not in the oversold area. Though on daily charts basis, it’s in the oversold reason and we may see dead cat bounce, but I will be very cautious as markets may still have way to go before finding any meaningful bottom. 11,300, followed by 11,000 and finally 10,700 are the area I would be watching closely.

    The story is almost similar on S&P500 but it has some other twists its story. S&P 500’s 61.8% retracement since Mar’03 bottoms is 1270 and that’s where it bounced back on Friday. It is sitting right there AND it is also sitting on 60months moving average that I mentioned above for Dow. But what’s keeping me awake on S&P500 is the VIX. There hasn’t been any panic reflected by high VIX so far. I am attaching a chart for SPX vis-à-vis VIX and you’ll find VIX is nowhere near the last highs when markets sold off. S&P500 is also in the same territory as far as MACD and RSI is concerned. So, same story, on daily basis, it is oversold, but on long term basis, it is not. I shall be careful of 1270, 1225 and finally 1172.

    There are a lot of other things going on in the equities market. India is down, China is down, people have lost lot of money in these markets as many of the “investors” are for first time experiencing bear markets in their recent “prosperous” life time , Japan is down, Hong Kong is down, Europe is down and heading for worst 1st half in last 20 years, Dollar is down, Oil is up, short-selling interest is amongst the highest level, banks are most down, Baltic dry index is slowing, new lows on NYSE is increasing, commodities are rising leaving less money for spending and in fact in some parts of the world it is triggering riots, and many more things to come.

    No one can manage your money better than yourself, and hence preserve the capital as much as possible. Cash will return much better returns than being fully invested, how? Because you will be able to buy things at much lower prices if markets were to fall further. There is no harm in missing an “opportunity” as one can always participate in bull rallies but panic selling doesn’t give time to get out. Panic selling doesn’t let one think straight and therefore may result in decisions that may be even worst.

    And I wonder if “The day” is still ahead. Let me remind you of the old saying, In the bear markets, the winner is the one who loses the least. Choose your asset classes right, if you were to still remain invested.

    For OPNewsletter, we are 65% in cash for the month and we shall take advantage of the upcoming bounce that we may see.

    Stay cautious, stay profitable