Once Again Short Delta

I have once again moved my delta short. For the last several weeks, I have kept my position between flat and short. Why have I moved short again? The answer is tail risk. The market is so high and overblown that you have a ton of risk to the downside. The Vix almost tested it's 11.4 low again this year, and it is trading at 12.46 now. You have to expect the market to revert with volatility at such a low level. We are also starting to see rotation into junk. You have crappy stocks like BBRY, CLF, JCP, and WLT up, but you have market leaders like AAPL, GOOG, TWTR, AMZN, or BIDU down or not going up. When we have this rotation we are almost alway near a top, but that perspective is subjective. However, being strategic and mechanical is more important than your direction. Stay strategic not directional, but their is a certain amount of room for delta risk. Therefore, I will not "load them up", but their is good reason not be long this market. When you have VIX at 12.46 you almost always will get some sort of reversion. Maybe we get a 5-7% correction in the next couple of week that may be it, but it could easily be 10-15%. Just because we are all getting back from Christmas vacation doesn't nothing can happen.

Here is an interesting statistical study on the market falling in the next few days:

Broken Wing Butterfly For Earnings

As most traders know, volatility gets inflated before earnings, and it gets inherently crushed after the binary event risk (earnings) goes away. When volatility goes down with binary event risk options prices get crushed especially in the front month and weekly options that have the shortest duration. Large account have many more options when it comes to earnings trades because of the amount of undefined risk they can take. However, with people with smaller accounts the options are more limited because they can not take the risk of a naked options with earnings. So the question is how can you get some of the exposure of a strangle/iron condor and a directional credit spread. So if we consider the butterfly it is a low probability of profit non directional spread. However, with a broken wing butterfly we skew it to our direction. In the example above, we sell 2 ATM options, and then we buy an options 1 strike further OTM. Then we add on an ITM option  that is two strikes away from the short ATM options. This skews the spread into our direction with a peak at a non event. What this also does is it embeds a credit spread with the short ATM options and the long OTM option that has a high probability of success. We then are long an ITM option that functions like stock (50% probability of profit), and volatility does not affect these options very much. Then if we apply this trades to earnings the ATM and OTM prices get crushed especially if the stock stays flat or goes our way. Then what happens is because of that premium crush the peak expands, and we have a greater range of higher then we might otherwise get with the spread. This is one of my favorite earnings trade because of the peak expanding. What you do is give yourself a high probability of success while getting a lot more profits that a trader might expect from just a short credit spread. 

Last Live Show

http://www.youtube.com/watch?v=75UaZpjOo9M&feature=em-upload_owner

Current Situation Study

This is an excel study I put together considering the VIX and the SPX.  These are the results.

Unfortunately Vix May Stay Low

Yes, it look looks like VIX may stay low again, and it will most likely drive market up. When Vix does blow through 16 it usually doesn't go much farther, and the down move doesn't continue. Therefore, I have kept out of short US equity (SPY,IWM,QQQ), and I have simply been selling premium in some high vol individual stocks. Also, earnings plays have been really good. Personally, my favorite strategy for earnings right now is the broken wing butterfly (I will talk about this in a later article). I have been short some crappy invid stocks (BBRY for example), and I have been short international stocks with the main short in EWW. I do have one big delta short US position and that is QQQ (Long a put spread). I will be closing out that winning position today. Other than that, I am also selling quite a bit of gold premium. These gold position have been tormenting my account due to the large daily swings in gold. However, gold have been a great trading product as it constantly mean reverts, but if you want to trade it you have to stay very small and understand your risk from a correlation standpoint. As in you have to understand what it means to be short puts in gold miner XYZ, then short a put in gold, and then long covered calls in a random silver stock. These position will all correlate and could easily be dangerous to your account if you don't understand this risk. Also, by the end of the weekend expect me to have a study posted about some of the action in the VIX versus the SPX to see if we can find any directional interest. Just remember to always apply a strategic play before a directional one. Duration over Direction......