OptionPundit

Tag: VIX

  • OptionPundit Interview: Author and Investor Jeff Augen

    Jeff Augen, currently a private investor and writer, has spent more than a decade building a unique intellectual property portfolio of algorithms and software for technical analysis of derivatives prices. His work includes more than one million lines of computer code reflecting powerful new strategies for trading equity, index, and futures options.  He is author of The Volatility Edge in Options Trading, The Option Trader’s Workbook, Trading Options at Expirations, Day Trading Options, and Bioinformatics in the Post-Genomic Era (Addison-Wesley, 2004). Much of his current work on options pricing is built on algorithms for predicting molecular structures that he developed as a graduate student. Read more about Jeff here; you may also want to read read my review of his earlier book “The Volatility Edge in Options Trading“.

    OptionPundit: Jeff, It is a pleasure to have you with us.

    Jeff Augen: Thank you.

    OptionPundit: Jeff, is there a KEY MESSAGE you would like to share with the readers before we begin our discussion.

    Jeff Aguen:  Before 2007/08 financial crisis, markets were stable. Volatility was low, markets were rallying. There were hardly any “flash crashes” and terrorist attacks were the only major uncertainty. However, since 2008 market structures have changed. Government involvement, inter connectivity of global markets and evolution of HFTs all have now changed the way markets react to news. Individuals who limit themselves to using traditional off-the-shelf indicators will always lose money to sophisticated traders armed with more powerful tools. The days of buying and selling stocks when moving averages cross or an oscillator reaches one side of a channel are gone. Moreover, investors who fool themselves into believing that they can exploit combinations of these indicators are making a huge mistake. Times have changed.

    Now program trading accounts for almost 80% of the trades. Super computers are being used and accordingly character of the trades has also changed. An example of how markets have changed is the intraday volatility; since 1990 S&P has experienced intraday High-Low transitions > 8% only 14times, 13 of which occurred in last 2 years. Today’s sophisticated investors tend to focus their attention on analysing subtle statistical distortions in volatility and identifying anomalies in derivative prices.

    OptionPundit: Jeff, as market structure has changed, can the retail trader still trade profitably? What would he need to stay in the game?

    Jeff Augen: The old way of using various indicators e.g. Momentum, stochastic, MACD is gone. He needs to realize that HFT’s /super computers will nullify any trends etc. by the time it is even visible to a trader on the charts. Retail trader need to understand the followings-
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  • How to Trade Fear

    So you have been watching this “interesting” stock market. One day down, next day up and in the end you don’t seem to find any “wealth effect” in your stock portfolio. And then there is this marvelous VIX, Uncle Ben’s bullish notes about subdued inflation, bullish economic data and you think everything seems to be going in the right direction. Then you see commodities surging, Gold and Silver making record high almost non-stop while US Dollar tanking. It’s an “interesting” market.

    VIX is almost at 3 year low and headlines will give one an impression that everything is brilliant, that market participants are complacent and satisfied and that risk is almost non-existent (Well, isn’t that what Uncle Ben wanted?). Part of the story I already shared on yesterday’s site i.e. VIX futures are reflecting uncertainty in longer term as opposed to shorter term. Now, let me share a chart (via Zero Hedge) reflecting fear as measured by indices that are not’s used, generally, in mainstream media. I had heard about these indices before but frankly it was originally Zero Hedge that connected the dots first (read more here). This is sharing those dots while adding a few trading ideas.

    The chart above has three indices in it. Let me explain the above chart-

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  • What Exactly is Option Trading?

    A Fascinating Friday ! That’s how I can think about Market’s action on Friday. Option trading is not only about attending a seminar, do some paper trades, get some winning trades and the stage is set. It is also about constantly evolving your own trading style and continue to sharpen your saw. With this post I hope you pick up one or two important nuggets that might add value to your trading style, so pls just relax and continue to read.

    First a simple one VIX– I mentioned on April 15, that I was not convinced of rally when markets are overbought for 6 continuous weeks; and shared my bias for bearish stand via $VIX bullish spreads.  Those OPN Members who followed it generated about +28.5% returns for 2 days holding. It could have been done with straight calls, but I wanted to minimize risk exposure without compromising delta.

    The King of Earnings- Google (GOOG)
    It was once in 6 months (if not 3) type event i.e. earning announcement just before Option Expiration. Those who have been with OPNewsletter for past 3 years, or at least have been reading OptionPundit blog, know how much I love trading Google.

    To begin with, I shared 4 different types of trades that could have been done on Google. Nothing much has changed Feb’07. However, this time, for OPNewsletter members I used one of my high yield/low risk/technical/intuition based strategy, Double Butterfly. We opened Google 540/550/560 Put Butterfly and 600/610/620 Call butterfly; for roughly $1.40 to $1.70 price combined.

    Google opened at $568 thus panicking some members, as it means 100% “potential loss” on this speculative trade. Based on “what if” scenarios I shared before markets opened, few members could still get out of the trade in “style” for break even or minor gains/loss even though Google was still out of our profit zone.

    But guess what, Google was pinned at $550, those who held till close, yielding almost +588% gains!!!

    But that’s not the end of the story, I traded Google almost live (though not recommended to members). I kept on switching between Calls and puts, resulting into +46% gains (bearish), then +21% (Bullish), then +95% (bearish), then +54.6%, (Bullish) then -12% loss (Bullish). Those who were following the thread live and could trade speculative (though not intended), could have still converted $1 into $10 by the end of the day!

    Google again, 95% gains; again out, i need to see if it can hold $560, if not, next may be $557…i am sharing almost real time to share how quickly i am changing my opinions….pls note, at one time, i have only one direction either bearish or bullish..i am not mixing two..(i have already close the 550 puts (i further broke the Bull put spread into individual options leg and purchased the short 550 puts, and still kept the 540 puts)

    added later, by the time i finished my msg, google was already below $556 and those puts were already quadrupled.

    Here is the screenshot of key trades I mentioned above-

    Google Intraday Transactions

    We didn’t even touch on Google Stock pinning as otherwise it would have just too much of trading to handle for a single trading day. Here are some excellent reads for OPNewsletter members on how to successfully play stock pinning, especially on Google. I also run a separate experiment (income trading strategy) with Google for following set of conditions – 1) Expiration week, 2) Earnings in that week but before expiration day; the gains were +18% within a few days even though google moved significantly against the “market neutral” strategy, before the earning day. I shall share this in another post.

    Here is another example of ISRG–

    Another stock I am looking at is ISRG, I had expected it to move about $20-$25, but it hasn’t…I don’t know if it will if drops below $372…I didn’t share it yesterday (i mentioned my bias on twitter though– http://twitter.com/OptionPundit/status/12171040022 ) as the options are not very liquid.

    ISRG closed at $360.39!! I am not mentioning Goldman Sachs (GS).

    Now the key points, why am I sharing all this? Recall back in early 2008 I shared on key factors that contributed to a record year (till then) for OptionPundit. Here are some additional thoughts.

    The Formula for Long Term Success
    Speculative trades should only be done with what you can feel comfortable losing, I must add, losing 100%. This is not income trading which many OPNewsletter members trade with over $100,000 and anything x 0=0

    This is a high risk/high yield scenario. The formula of long term success is

    Long Term Success = (Profit $$ x Winning Trades) > (Loss $$ x Losing Trades)

    Don’t be stubborn with your opinion–
    One shouldn’t marry to a single opinion. Markets can humble anyone, anytime and it has demonstrated time and again. No one will always be right else there won’t be a trading market. Keep agility and flexibility as your competitive advantage. Remember, the end goal is not to be right rather it is to make money. I encourage OPNMembers to re-read the whole speculative thread (May 2010) how often I changed my opinion between bullish and bearish, the same day, often in less than 30mins.

    Trade with a plan and be nimble
    I didn’t send alerts for these Google trades for OPNewsletter Members, only demonstration. I don’t put stop loss on the screen as I don’t want it to be shown to brokers. I keep a mental stop loss and write it down and close it. Why am I sharing this? Because one may say, with “hindsight bias”, that there was no need to trade so much, you would have made a 1000% gains (10times) if you just held those 560 puts till expiration; I was not in for a 1000% gains, I was trading and time value was against me, and I was just following my trading plan.

    Option Trading is both Art and Math
    The twin butterfly we opened would have been a 100% loss if Google were to close above $560. But breaking the flies into vertical spread, then finally into singles achieved great result for even those who panicked and wanted to get out to collect “whatever” was left. Options are very versatile, so just don’t 100% loss. Create “what if” scenarios for if it goes up, goes down or move sideways. No one is much more in touch with your trades as you are and hence prepare in advance yourself and don’t just panic. Panic never helps, it about keeping the big picture mind and bringing that to trading world. Trading is equally tough like any other business, if not more.

    Here are some additional thoughts on how to become a more profitable trader.

    More trades to come. There are more companies announcing earnings in next few weeks so stay Tuned,

    Profitable trading, OP

  • How to Play Next “Black Swan” Bear Leg

    Which side are you at? Bull or Bear? Based on the current market sentiments, general bullish bias, feeling of missing last up leg and given that every indicator is screaming buy buy buy, chances are that you are on the Bull’s side. If so, there is not much point reading this post any further.

    There are still a few perma-bears (and they have solid record to attach) are predicting about March lows being penetrated or touched again. This kept me thinking if I should listen to what they are saying given their past history.  So I worked out a low risk strategy that is explained later in the post. What if they (and hence my bet) is wrong, I’ll lose 100% of 1% trading capital that I have invested in this idea. But what if, even though it is only 4% probability, these guys are correct? First trade has potential to return over +2,800% with 4% delta based probability (by Dec’09 expiration) and another trade has potential to generate +700% with 24% probability (by Nov’09 expiration).

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  • Panic Before Everyone Else Does

    I have tried my best to warn OP readers of the upcoming storm, over and over again starting from November 2007. Fun fact, this is what I wrote then-

    But hey, if you do get a bearish market, then don’t forget to mention that you were told first hand here at OptionPundit.

    We are close to disastrous situation, Yesterday markets closed almost in the range that I highlighted in Nov 18 post. Net, here we are with a bear market signal. Very close to some extremely strong support areas 7,000-7,400 for a bull market that started from 1930s to 2007. I shall caution to stay away for a while till Mr. market make-up his mind.

    I warned in Mid Sept’08, and OPNewsletter stayed away for Oct’08 portfolios, preserved capital by allocating almost 1/3rd of capital only and been reinvesting since then. Though results are not that spectacular, but nevertheless it is an outperformance in the face of tough Market that we are facing. We have opened 2 portfolios for Mar’09 yesterday and will soon be opening more. If you are interested in joining, pls click to know more about OPNewletter.

    Hope you are on InvesCafe, this is the place I use for short updates for intraday trading opportunity. Just yesterday alone, I shared 3 intraday opportunities (VIX, HPQ and AAPL) all three registering good gains. It’s a great tool and I have been using it for while. Check this out for how many profitable alerts I shared over past few days. I shall encourage you to sign-up and start using it, it’s wonderful tool. All my InvesCafe updated are posted to Twitter automatically as well.

    Today is US Equity option expiration day, and also CPI data will be released at 8:30 US EST. Expect the volatility exacerbated by already <7,500 level. Stock pinning, cheap options and lot more to trade, but trade carefully.

    Profitable Trading, OP

  • DOW, S&P, Nasdaq All Up

    The Dow increased 4.7% closing at 8979.26, the Nasdaq was up 5.5% to finish at 1717.71, and the S&P was up 4.3% to finish at 946.43. Leading sectors Coal and Consumable Fuels +13.3%, Education Services 13.2%, Steel 13.1%, Oil and Gas Exploration 12.1%, Gas Utilities 11.4%. Gold will surely make it to the lagging sectors.

    Though the rally came on more than average volume, the up volume wasn’t impressive at all. The new lows also increased. Net net, poor market internals in the face of a “strong” reversal, far short of saying any strong bounce.

    I earlier mentioned my bias via alerts on InvesCafe–

    I am worried. There is so much optimism that Friday was bottom. It will be nasty surprise to many if it wasn’t.

    We are seeing almost thousand points move every day for Dow. VIX was at record high (over 80%) when I sent out an alert mentioning that “theoretically we should see a rebound” but don’t be surprised if this IV also represent a big crash coming. The moves are becoming bigger, the volatility is higher, the news is bad and so one. I wonder if this is a precursor to any big crash on the way.

    On the other hand, Friday low might prove to be low for this bear market as well. So I want to be ready. There are some interesting value emerging in this market and my list for value stocks is growing each day (You can check my current list if you are an OPN subscriber). I would like to do pre-work now so I can move funds at the confirmation that a bottom is in place.

    Google announced good set of results and hence up GOOG +10.9%; AMD +10.9%; IBM +2.2%… low ones are ESLR -16.5%; TPX -12.0%; LEG -11.2%; ESLR -10.6%; PMCS -6.1%; SYK -3.2%., CBI -6.2% ,CMI -5.3%

    Tomorrow is US equity Oct’08 option expiration, so expect volatility, this is also a time for maximing leverage as all the OOM options are left with is the IV and time value which reduce to zero by the end of the days if those are still OOM.

    Have fun and profitable trading, OP