Thursday, January 21, 2010

Changing of the Guard

Quite an interesting little turn of events we have going on the last few days. We haven't seen a sell off of yesterday's magnitude since October. Nothing like a 2% drop to wake the market from its slumber. Tack on a 30+% rally in the VIX and we may just have sufficient reason to start considering being more active with bearish bets. After last July's debacle, I've been a bit reticent to aggressively enter any bearish plays. So far that's been a smart position to take, but based on recent price action my inner bear is starting to get antsy. As mentioned in my Buy the Dips Sell the Rips post, when bearish I prefer using rallies as an opportunity to reload on bearish positions such as selling call spreads.

A quick glance at a 30 minute chart of the SPX shows we now have a decent amount of overhead resistance in the 1130-1150 area.
[Source: EduTrader]

Those currently in the bear camp may consider rallies into this area a potential shorting opportunity. If we break back above 1150 to new highs in the SPX, then all bets are off and I'll have to set aside my bearish aspirations for the time being.

In the short term this sell-off is overdone and likely to bounce in the near future. Based on the sharp rise in the VIX over its upper bollinger band, the build up in fear has gotten too excessive and will likely subside.


Anonymous said...

Hi Tyler,

Maybe things are changing but not as fast as it seems right now, so we'll wait for the rip in the VIX chart.

I've just revised your "Buy the Dips Sell the Rips" post that I found very appropiated, and it remains me what lot of people do : "Why make things easy when you can make it difficult !"

How could we identify that the VIX have reached the top ?


Tyler Craig said...

Yeah, I'm sure we're all guilty of over complicating trading from time to time. I'll tackle the "how to pick a top in the VIX" question in my Monday post.

tim said...

I too have been sheepishly bearish for awhile. My portfolio of iron condors are fine because I hedged with shorting stock. But even being delta neutral, I still watched the vega rise suck away my unrealized profit gains these last few days. So I added on double calendars Friday to bring my vega slightly positive.

1. with VIX high on other side of BB now, should i stay vega negative?
2. double calendars (feb-march) can't be spread wide like condors because of sage in middle of risk graph tent. Are they a good add-on repair to the condors in this market of increased price movement?
3. Since we are 27 days to expiration, is it getting too close to add double calendars? (feb-march)?

I look forward to Monday post on VIX top.

Tyler Craig said...


1. Depends on your time horizon. Short term I think the VIX is overdone, but that doesn't mean over the next few weeks to months it doesn't go higher.
2. I've never played around much with adding calendars/diagonals to an iron condor. They definitely hedge your volatility risk, so can be used in that respect. Do they hedge directional risk? Depends on which strikes you use so If I were to go that route I'd definitely use a risk graph to plot it.
3. Not necessarily. In my opinion as long as there is sufficient premium in the Feb options to allow a good enough potential reward, Feb-March calendars are still in play.