Monday, June 14, 2010

From One Extreme to the Other

[Source: MachTrader]

Since illustrating 1050 and 1105 as two key levels in June 2nd's Lines in the Sand post, this trading range has proved quite resilient. Just as the bulls thought a break to the upside was imminent on the eve of the Employment Report, the bears (including myself) thought 1050 was toast last week. But alas, both prognostications have proven unfruitful so far. I suppose this illustrates the importance of waiting for confirmation. While it's fair to speculate as to whether we're going to breakout or not, it's usually prudent to wait for some type of price confirmation before allocating any capital to the idea.


Steve said...

So when the SPY (or any stock) is trading in a range like this, do you go with more delta neutral trades that capitalize on a consolidated range? Do you kind of shy away from trades until you see that confirmation? It seems like the swings are so huge (on the SPY) that even trying to capitalize on the range can be difficult because one day it is at 1050 and 2 days later it is up at 1105.

Tyler Craig said...

Hey Steve,

You could have played delta neutral plays on the SPY like a condor if you expected the range to hold for awhile. You'd also get the benefit of a drop in implied vol that would likely come (as we've seen over the last week- VIX from 37 to 26) if the market does stay in the range. I didn't really expect the range to hold for this long, so I didn't enter any new neutral trades. Though in hindsight it would have been a profitable trade.

As far as shying away from trades, it really depends on what I trade. If I was looking for a directional trade on the SPY, then yeah, I'd probably wait until we breakout one way or the other. Though you could could have bought the SPY around support (105) or shorted them around resistance (111) with a tight stop above/below either level.

Also, just because I didn't have a strong bias on SPY doesn't mean I couldn't have found trades elsewhere where I did have a bias (volatility- VIX, VXX or commodities- GLD).


Markets can go to extremes at times.