Longs Beware of the Vix!

Usually I have some wise man tape reading words, but today I do not (my terrible attempt at comedy). Anyway the markets are mixed you have some major stocks down (TSLA, XLE, GMCR), but then there are some stocks that are are strong (FB, AAPL, GOOG), but my watch list seems pretty mixed. The RUT and Nasdaq are leading and the S&P is simply following. I think we will see danger when no one expects it. Beware of the VIX! Until then wait for the higher vol to sell and stay small.

Considering tough markets......

 Take a look I talked a bit about tough markets:
http://www.ustream.tv/recorded/40894342

Calm down Strategic Traders

This is a miserable time for a lot of strategic options traders. The market is up 31% this year, and there have only been two occurrences from 1992-2012 of the market being up more than 30%. Also,  we have been parabolic in the S&P (we have gained 171.25 S&P points in the last 3 months or more than 10%). However, do remember that moves like this are extremely unlikely. In the last 63 years, the S&P is only up 2.5% or more in one day 243 times! This has to prove that strategic options trading works. The probabilities do work and volatility based trading does work. If you stay consistent with the way you trade the markets will turn around. Another example, would be selling calls in AAPL, BIDU , and AMZN in the last two years. These stocks were some of the technology leaders and had huge parabolic moves. However, selling the 69% OTM calls into strength and covering the trade after a couple of weeks in these three underlying's made $8,905.5 in two years, but buying the calls lost over $11,000. This proves the strategy; therefore, stick with what we (strategic options traders) have been always doing.

Sleep City S&P's

The S&P's/the market right now are sleep city. We had a 21 point down day and then a 21 point up day. The Vix is low and stocks are not moving. The only markets that have seemed to be moving a lot are bonds and Euro's. Therefore, I am flat delta. There is some serious strength in the market considering the last two days. I guess that should tell me to be long, but I don't see any huge amount of reasoning for it. That is especially true when volatility is low and I don't what to trade much short premium like I usually do. This makes it hard to find interesting opportunities. There are a few things such as EWW, GMCR, and EWZ for example, but that is all there is. In times like these it is almost impossible to be strategically diversified. Therefore, most of my positions are vertical spreads. I may implement some calendar spreads in maybe the SPY or IWM in the stock markets. Bonds (TLT) is interesting for a calendar spread and maybe some long call spreads. The major short premium plays remain in a couple gold and silver stocks (GDX and SLW mainly), and there are a few earnings plays that still may be out there. Overall, this is not a great time to be aggressive in your trading. The returns are simply no there. The way to play the market right now is stay involved but save your capital for better days.

Earnings to Supplement Durational Trades

This is a really bad environment for options traders (most of my readers). The vix is sitting at 13.65, so it is not a great environment for strategic options traders due to the little cost basis reduction available (small options premiums). Therefore, a lot of traders like me are a little bummed, but there is some wonderful opportunity hundreds of times every quarter. EARNINGS SEASON. That is right earnings. Earnings possess a great opportunity for options traders due to earnings volatility crush (when implied volatility falls after the binary event risk goes away). Volatility gets pumped coming into earnings, but a options trader can take advantage of this by doing specific options trades. These trades despite risky can significantly make up for low volatility. The key is to stay small. Stocks are very unpredictable in nature especially going into earnings, but volatility is predictable and mean reverting in nature and therefore can be predicted. I will warn you from buying volatility into earnings. Statistically buying volatility into earnings loses money. Actually, buying a straddle into earnings in AAPL, GS, and IBM (picked at random) made money 30% of the time. However, selling wide strangles into earnings made money around 70% of the time. I recommend for sure selling volatility into earnings, but please make sure you have at least 6 months of trading experience before you dive in.

Weak Tape Action

From just watching the markets, I see several cracks in the surface. I am seeing lots of strength in stocks like NEM, BBRY, and JCP up. I mean BBRY and JCP are on the verge of bankruptcy. Then stocks like TSLA, GOOG, AMZN, and YHOO  are weak. Then we have Gold strong, oil weak, and bonds strong. This tells me that we do not have a whole lot of demand for risk markets like oil, and their is quite a bit of demand for something "safer" like gold or bonds. In the end they should all go down toegether. Along with this, you had the VIX up a bit. It seems it is ready to start mean reverting as it always does when it starts trading in the 13-11 zone. So, I am again positioned short premium, but I have on short delta in in bonds, gold stocks, stock indices, short BBY long oil (as hedge), long JCP, Long GRPN, Long JCP, and long BBRY. This amounts to about 17 positions.

Just Flipped Back Short

I just flipped my positions from long to short. I covered most of my longs on the way up in the last few, and I have added some short to replace. The reason for this is the Vix, so hopefully we can get a quick down move (vix pop), and I can roll over back to long. The largest short position (delta wise) is in IWM and I will close my iron condor. My major long is in DIA because it is part of my DIA-SPY long pairs trade. I also rolled over to short deltas in Gold (GLD), but I sold an iron condor in GDX because of the vol opportunities. However, there is not a lot of opportunity to be short volatility because VIX is low, so a lot of other stocks do not have high implied volatility. Again, there are a few stocks or indices for short premium, but there is not a lot of stuff worth getting aggressive in. For now, this is debit spread time, and directional stocks. The lower volatility gets the more directional plays are because there is not a lot of opportunity for volatility to get crushed. However, I am staying with my positions, avoiding earnings stocks (binary event risk), and I will not be getting overly aggressive. Staying small is key right now, and get as much theta as you can. However, do not go overboard. Remember volatility is still low.