Sticking With the Long Side for Now

I know I am a little early on my positioning, but I wouldn't fear the fiscal cliff drama. There are very obvious cracks in the surface. The Vix is looking toppy, the market leaders are looking very strong (SBUX,FB,TSLA,AMZN,BIDU,YHOO, and the Russell stock index), and we had a very strong fiscal cliff reversal on the gap down. So my general idea is buy the dip, fiscal cliff is basically priced in (as expected), and the market will keep going up on easing (which makes no sense). Also, the small caps were up on the day when the market was down. This is also a worrying sign for shorts as small cap stocks usually  lead the market moves. I am also worried about gold; however, I still am small directionally long and I am selling non directional vol in some stocks (staying super small). As for my positons delta wise (excluding theta because I usually sell theta) I have several calendar spreads on in SBUX, BBY, IWM, and X. I am short a little AAPL, long a little DIA, short a iron condor in EWW, Short some FXE, long a little FXI (diagonal spread), Long a little GDX, long a little Gold, long GOOG, long JNJ, short an iron condor in NEM, short POT, Short QQQ, way long SPY, short bonds, short a little UNG, Long Oil, closed my VIX positions (almost at the high of the day), long a little WLT, and short retail.

FYI, Below is a little study Julian Marchese did on buying the market from what has happened today:

I admit it! I am long

Yep, I am long. Todays action was very mixed. You had GOOG down over 1%, you have AAPL down 1.5%, AMZN a little bit weak, Utilities weak, Oil weak, SBUX weak, and Dow very weak. However, Vix is weak, bonds are getting to an interesting topping area, TSLA is strong, Home Builders are strong, Russel is pretty strong, euro is strong, YHOO is strong, and BIDU is strong. However, the S&P is not showing a lot of weakness, so I am long. My positions delta wise are short some stuff long oil, long S&P, short bonds (due to correlation it means long stocks), long gold and different gold miners, and short euro (not including more specific individual positions). As for some main stocks delta wise I am short AAPL, long GOOG, I have a calendar spread in SBUX, a broken wing butterfly in XLE, I am long a call directional diagonal spread in FXI, and long a little GDX. So those are basically my positions and hopefully that gives you guys some ideas.

We are Down. So lets talk trading strategies!

Wow! My screen was red the past few days. Is that legal? It was probably a computer glitch. Anyways, my peeps sent me studies and usually when the markets are down 3 or 4 days in a row most of the time the market went up later. Otherwise, I have been short stock indexes (very small), short euro, long oil, long gold, flat stock indexes (long SPY short QQQ), short some brazil, short emerging markets, long gold (entering), have a few non directional and directional spreads in individual stocks, and once again I shorted some put spreads in GOOG. I exited all my AAPL positions for pretty good profits FYI, and the iron condor trade in my trade ideas post has done pretty well. 

However, I wanted to talk strategy and mechanics. As my viewers and readers have read, I stress mechanics and statistical edge. The statistical edge I have usually is theta however there are some anomalies in the markets that can be found through a large amount of statistical research (one of my best friends). So, as most options traders know vol is crazy low. The volatility this year has been very torturous. My theta right now is about 1/3 what I need it to be because of the volatility. However, a really good way to alleviate the problem is using calendar spreads. Calendar spreads are shorting a front month call or put and buying a back month option at the same strike price. This is a great time for calendar spreads, especially if you are a contrarian trader. My friends over at tastytrade.com did a study with directional calendar spreads (moving your strike lower than the stock price to give yourself short delta) and the calender spreads by far outperformed the short call spread and long put spread. The reason for this is because these type of spreads (calendars and Diagonals) benefit from pops and volatility, and volatility tends to pop up very fast from lows in short periods of time. So these spreads are usually very boring, but you have a great statistical edge with them because of the way volatility acts. Also along with the exposure it has to pops in volatility these type of spreads often have long theta in them which means you will also profit just from the time decay in the spread. 

So, some of you are probably wondering how the last paragraph has anything to do with statistics, strategy, and mechanics. I simply wanted to illustrate another edge that you can use to your advantage in today's low volatility environment . Edge should always be a part of how you manage trades and strategy. If there is no more edge don't do the trade. If the probabilities don't make sense for your side of the market anymore close the position. At the current time, it makes most statistical sense to be doing calendar spreads and the most mechanical sense for your portfolio management.

Trade Ideas

As most of you know, I am a very active (often directional) trader who often has between 15 and 30 positions on at one time, but I believe my trades make money because of time decay and not because of my personal directional biases. However, I have never really given any specific trading ideas. So, I am doing this new thing where I will give out a top trade idea. These trades will also cover a large number of stocks, futures, Forex, and bond products. I am agnostic to trading products for the most part so I will have a large mix.

Today (premium play):

Since this is a trade that I don't have a particular opinion in, but I still wanted to do a skewed iron condor I gave it skew to the upside. The trade has a $33 dollar risk to the upside,  a $133 dollar risk to the downside, and a max profit of $67 giving it a 66.5% chance of making money. The vol in the product is also pretty decent trading around the 62% percentile in its one year range (it is best to do iron condors into high vol because of the premium). I prefer skewed condors because it decreases risk to one side if the markets fall to far and since there is a 16.75% chance that either side of the condor is in the money by expiration you might as well decrease risk on one side because between that 33.5% chance of not being profitable you have a 50/50 chance of being on one side or the other, so lets reduces the risk on one side (if you did a normal iron condor the risk is the same on both sides). The only bad thing about the skewed is your sweet spot (area of max profit) can tend to be a little smaller.