As an options expiration day arrives, traders note that stocks sometimes get "pinned" to a specific strike price. But now that every week is an expiration week for a select group of stocks and ETFs, will we see this phenomenon every Friday?
This title assumes a great deal. It assumes that as a trader you are already profitable and that markets are not ordinarily scary. If you can identify with these assumptions, then you have come a long way in your development as a successful trader. In as much as 95% of traders fail in their attempt to become successful trader. I suggest I back up a bit and address this to those who would be amongst that 5% who are consistent winners in this zero sum game we call day trading.
Once again, the pendulum swung back to the "risk on" position despite the uncertainties created by the unresolved macro debate over deficit cutting or more stimulus and coming changes to the financial system from "Fin Reg".
People are excited about tail risk. On the institutional side, banks and asset managers are packaging up complex, multi-asset hedging products and selling them to pension funds, endowments, and other natural longs. On the retail side, Barclays and others are getting great traction with products like VXX, VXZ, VXX options and now XXV.
Do traders expect more volatility in the longer term than they do in the short term? The one-month volatility (VIX) is almost always lower than the (three-month volatility (VXV), but sometimes it soars higher.
For the expected downside, or to hedge existing long positions, we think an interesting idea is to employ debit bear put spreads and credit call spreads.
In theory, a more volatile market in the next 30 days would justify higher options prices today, but does the VIX usually get it right in practice? Does today's VIX have any correlation with actual volatility over the next 30 days?
From "Risk Off" last week it was "Risk On" once again with an oversold rally taking the S&P 500 Index 5.4% higher. Now traders and investors want to know if the bottom has been made, or should we expect to see lower lows?
After a substantial rally that took the index past the overhead resistance at 1040.78 look for a minor trend change indicator for clues that this run could be about over.
One of the basic directional spreads in trading options is that of the vertical spread. It is extremely versatile and represents a major building block of more complex spreads.
Equity investors who want a broad-based hedge have essentially three vehicles from which to choose: equity index options (SPY, SPX, ES, etc.), VIX futures (or their ETF permutations), and VIX options.
The markets appear bewildered switching back and forth from "risk on" to "risk off" as if there is nothing in between. Now equities are in the risk off position as they accelerated to the downside creating a dramatic change in the technical condition.
Now the best plan is conditioned on the behavior of the SPX in the next few days. If a solid oversold rally develops then we suggest long call spread positions with defined risk in the previous strong sectors. Here are a few ideas.
The apathetic response to numerous fundamental developments last week could partly be attributed to seasonality, but a more likely explanation is the lack of clear vision for the global economy. Slower economic growth in the US and the many announced cuts in government spending in Europe are rekindling the inflation vs. deflation debate once again and creating hesitation.
The initial months of this year have been characterized by a low implied volatility (IV) environment in virtually all underlying securities. This milieu ended suddenly and abruptly on the recent "flash crash" and IV generally remains significantly elevated above its recent nadir.
In Roman mythology the god of beginnings and endings, Janus, is typically portrayed having two heads, each facing in opposite directions. His countenances are displayed in this manner so that he can observe the past as well as the future. The two types of option volatility, historical volatility and implied volatility, also reflect this dual perspective.
The S&P 500 Index broke out above the upper trendline defining the falling wedge technical pattern. Since the volume on the breakout appears to have been not as high as required for a valid breakout we are suspicious that it can meet its measuring objective above the April high.
Expecting an upside bias we set up our RT Spread Scanner and found some possible suggestions in the oil and gas sector that we are now calling event related due to the supply uncertainty from the problems in the Gulf of Mexico.
The CBOE Volatility Index (VIX) continues to make news. With the VIX hitting its one year high last month, it continues to buoy near 2010 highs. There is no shortage of media coverage on the VIX either, which may be prompting investors to try to profit off of it.
This oil spill is like a vortex. Ruins everything it touches. Coastline, jobs and companies, you name it. Like the spill itself, it casts a dark shadow over the market. What the spill is doing is affecting market sentiment and not in a good way. We can now actually measure market sentiment and create a number from it and combine that number with other market data.
Last Tuesdays' news that the Swiss National Bank's foreign currency reserves increased 80% in May resulting from the sale of Swiss francs and investing in Eurobonds, at a rate that appears to have exceed that of the European Central Bank, helped turn the tide of the very oversold euro. The result, a somewhat stronger euro also boosted equities and the economically sensitive commodities.
VIX skew can be a good indicator of the future. It can also fail in that regard. In actuality the VIX skew is just the sum of expectations for the future. And expectations of the market can be right or wrong.
To find a week with a comparable litany of bad news we need to go all the way back to the week ending September 22, 2008, a week that included the Lehman Brothers Chapter 11 petition of Bankruptcy and then after reducing their credit lines, Bank of America announced it would buy Merrill Lynch.
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