Head For The Beach

It’s the height of summer and over here in Spain we are mere days away from the entire country shutting down in August. Yes, I am dead serious. Starting next week it will be impossible for anyone on the Iberian Peninsula to make a doctor’s appointment, get a haircut, fix your car, meet with an attorney, negotiate a contract, etc. Just found some tentacle growing out of your ear? Tough luck José – it’ll have to wait a few weeks. Got hit by a truck riding your moto and you may have severed your spinal cord? Better walk it off tough guy – those x-rays will have to wait until the doctor’s back from the beach.

Anything business or health related will have to wait until September as most offices here simply shut down for a minimum of two weeks, economic crisis be damned. For a born German who spent over 20 years in the United States this is a rather alien concept to wrap one’s mind around. It’s not that the Spaniards lack sufficient holidays during the rest of the year, if you get my drift. So apparently it will once again fall on me, the lowly Mole, to keep the Spanish economy running for the next four weeks as my lair will apparently be the only business open during August. Hey, but I can’t make any promises – it is brutally hot over here and it’s getting hotter by the day. I think I may have to raise subscription fees just to be able to afford the electricity bill as my industrial scale air conditioner is blowing day and night. And did I mention the humidity? It’s not California, that’s for sure.

Alright, and now that I have properly set the mood let’s see where we are this morning. Still bouncing around in the range of pain – the high volatility sideways range persists and entries near the center are veritable coin flips. But the good news is that it gets worse:

This is the event calendar for today and tomorrow and guess what, it’s that time of the month again. Wednesday the Fed is scheduled to announce its interest rate decision and also report on its MBS and treasury purchase programs. I don’t expect any type of resolution before tomorrow at 2:00pm EDT and most likely we’ll be seeing sideways flat or gyrating tape in the interim. May actually be a good time to watch the Zero Lite indicator if you happen to be a sub as sideways days like that make for good scalping/swing trading opportunities.

For the rest of you guys I recommend you discover your inner Spaniards and find yourself a nice beach, preferably with bar service. And if there’s no beach nearby you live then find yourself a lake, a cool mountain resort, or if everything else fails head to your favorite coffee shop or watering hole. Bring a book and turn off your laptop/ipad/iphone what have you so you’re not tempted to check the tape. Anything will be better than trading for the next 30 hours. That’s it – see you guys tomorrow!

What – you’re still here? What part of taking the day off wasn’t clear to you? You are an addict, you know that, right? Well, I understand because so am I. Which is why I kept hunting around a bit for short term setups to bridge us over until tomorrow. Very loose correlation to U.S. markets would be good. Here’s the EUR/SEK (swedish krona) which is in a very interesting configuration. I want to be long above 9.185 with a stop below the 25-hour SMA.

And then there’s platinum – may be affected tomorrow at 2:00pm of course. So if you grab this long above 1490.6 then be out and about by 1:30pm tomorrow. Otherwise it looks like a solid long setup after a nice correction. Decent odds and worth 1R on my end if it makes it over my trigger.

Alright, and that’s it for today. UNLESS of course something very exciting/dramatic happens during the session ;-)


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Insurance Is Still Cheap

Now, before you do anything else I need you to first read Scott’s equities related perspectives which he graciously posted earlier this morning. It’s spot on and I could not agree more. As it so happens however I have quite a bit of material to add today – you may want to grab a cup of coffee or your favorite tea.

A little caveat before you read on: None of the below suggests that we are switching into bearish mode (just yet). Whenever you look at long term charts remember that they are just that – LONG term charts and that means that price usually takes weeks, if not months, to produce conclusive evidence suggesting that the ongoing trend has been broken. Effectively Scott is saying that we’ve come a long long way since the last correction and it’s not wise to overstay your welcome on the long side given that we are in a low volatility melt-up that could easily turn out to be an exhaustion spike. So what does that all mean then? Well, that is exactly what I’d like to address this morning:

Let’s start at the daily panel on the spoos which earlier in today’s session was dangerously close to testing 1965. That is where the 25-day SMA and our daily NLSL stand right now and a breach below would mean we probably drop toward 1910 or lower.

The S&P cash is of course our final guide and the hourly has thus far managed to hold its 100-day SMA. That’s good news but at the same time it’s not been able to launch a counter response all last week which is a big negative. A drop through SPX 1975 could launch a long covering frenzy during the low participation summer season and thus easily drop price toward SPX 1960 or lower.

But frankly, although I use the SPX/ES as my price gauges I wouldn’t trade either one. If you’re a sub then you’ll find two separate (and very juicy) setups at the end of this post. But first things first:

Let’s assume we really do proceed lower from here – perhaps today or maybe in a week or two from now. Looking at the monthly I see a pretty solid first support line in the form of a diagonal which currently meets price at around ES 1934. If that one should give (very doubtful at this point) then I think that our monthly NLSL at ES 1854.5 would offer support for at least a week or two.

So now that we have established two reasonable price support zones let’s talk about buying insurance. If you’re holding equity related instruments in any form or shape (most likely stocks or ETFs) then this is not a bad time to put yourself in a beta neutral situation.

Why? Because insurance is still very cheap – the VIX  has been spiking a bit lately but last Friday it has settled back near the 13 mark. Volatility of volatility however has remained elevated and either equities proceed higher from here or we are in for the brunt of the storm.

Here’s Friday’s option chain on the Spiders – we are looking at the September put options which still have over 50 days to go. I very rarely hold (hedging) options beyond 30 days to expiration as theta burn really really starts to kick in at that point. The two puts I have highlighted would put us in the money (ITM) at each respective inflection point I talked about above. The respective premiums on Friday for the 195 was $290 – the 187 is about $123. That’s not a horrible spread on both but consider that you are effectively losing $30 and $20 instantly when purchasing these.

Now for some reason I made a mistake and used the 196 when I put it on the simulator but for the purpose of this exercise it really doesn’t matter. This shows us the profit and loss of our put option based on where we are heading from here. Obviously if we are heading higher than you can kiss your premium goodbye – your put will expire worthless as the majority of options usually – especially out of the money (OTM) options. If we cross another bullish inflection point and you’re quick enough you may still be able to re-sell them before they lose all their remaining premium.

But if we drop lower then you see that we’d be banking some very nice coin. I have spiced this one up a little by adding four volatility extensions – basically it’s simulating what would happen if volatility would raise by 10% increments from here. I think the most we can expect at this point is perhaps a push to 23% before we hit support – the other increments are nothing but science fiction at this point.

In essence this shows us what a huge impact an explosion in option vega can have on option premiums (puts and calls alike by the way). IF we actually drop toward our first price support zone near SPY 194 (i.e. ~SPX 1940) and IV hits 23% then we would bank $477.52 in profits – not bad at all. Given that we spent $323 on the premium that’s an acceptable risk given where we are – but it’s nothing to really write home about. However as we are still near the all time highs it’s reasonable to assume you would be able to sell this one back for over $200, which makes it a decent play.

Now here I have taken the same simulation and aligned my cursor at the 186 price slice – we are now near at a profit of $983 but that’s still at 23% IV which is unrealistic. I think if we really drop this low then we’d be a lot closer to 33% resulting in over $1200 of profit.

Of course much of this may just be mental masturbation to you so I decided to borrow Stewie’s time machine and travel back to January 22nd when we were very near where we are right now on the Spider volatility side.

As you can see the option chain I picked is the March 2014 contract month which at that day at 58 days to expiration. Perfect – near our current 53 day number on the September contract. The put I highlighted is the 183 – very similar to the near the money 196 today – and it would have cost us $312. Actually since I’m already there let me buy a few of those for myself and a handful for Stewie’s World Domination fund.

Now I just traveled forward in time when equities were scraping new lows in early February. Out of fairness I did not pick February 4th, when the VIX was painting a high – instead we’re using the Friday session where it seems clear that we may have spiked. What’s our volatility today? It jumped to 20.26% – that’s not bad but shy of the 10% increment we were simulating. Nevertheless our premium has pushed to $935 banking us a juicy profit of $635. Let’s sell those suckers and laugh all the way to the bank.

But wait – not so fast – what I forgot to mention is that I also loaded up on a few OTM puts – the 177 strike price is about the same distance to the strike price in January as we are now to out lower support zone of ES 1854. We were able to afford two of those suckers for the price of one near the money put and they have banked us $772.

Of course making money with OTM options is very very rare and quite frankly OTM options should always be considered either lottery tickets or pure hedge-your-ass-for-the-rupture luxury trades.

Alright – before I go let me show you how I would handle today’s price action. Please grab your decoder ring and meet me in our air conditioned luxury lair:

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You have been briefed – now have fun but keep it frosty.


No Crying Over Spilled Milk (Or Beer)

I’m sure you all know what I’m talking about. Here we were trying to short this bitch several times in the past two days which on my end resulted in three ignominious stop outs – the last one at 1982. Only 1.5R lost, so it wasn’t a big deal but pretty much what I told you yesterday ‘would happen’ of course ‘did happen’ the next day. There was no reason for my stop to be at 1986 – it was too far in enemy territory. And then equities got Amazoned and here we are fifteen SPX handles lower. So what do we do now?

I tell you what we’re going to do. ABSOLUTELY NOTHING. We did everything in our power to exploit an entry opportunity near an inflection point and we simply didn’t get in. That’s life and unless you were on the inside there was no knowing ahead of time that Bezos would slip on the banana peel last night. Don’t beat yourself up – actually better yet, get used to it. Which is why we don’t take large risks on the equities side – or any correlated market for that matter. 1% is the max and if you’re a stock market junkie then always keep a close eye on being as delta neutral as possible (look it up or ask in the comment section).

Now on the ES futures we’re near 1971 right now and there are no major support zones nearby. ES 1966 looks like the next best line in the sand as the 100-hour BB is lingering around down there.

The S&P cash however has been holding its 100-hour SMA and we’ll have to wait until Monday to see if it holds.

But the real news of the day is the one that hasn’t been reported. While everyone else is talking about yesterday’s losers I’ve been taking a long position on the Dollar side (yes, I can’t believe I just said that). This is actually a weekly setup I shared with my subs last night and originally we’ve been expecting ole’ bucky to do the same old thing which is fold like a chair near any major LT resistance. Now I can’t promise/expect that this time it’ll be different but those two NLBL breaches do look promising. The fun may begin if we see a pop aboe 80.993 – so make it 81. That’s where the 25-day SMA sits right now and we’ve got plenty of air looming above.

This is the first time I’ll show the turkish lira here and I have to confess that I haven’t traded this one before. So I’ll ease myself into this one with 1/2R. I however do like the double inside day – and I’ll play the outer one on the stop side. I hope that’s clear as I don’t think my drawing is. Long Sunday on either breach of today’s candle (high or low) – but set your stop on the opposite side of the Thursday candle.

More setups waiting below the fold for my intrepid subs:

More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

Please login or subscribe here to see the remainder of this post.


And now it’s time again to kick back and crack open a bottle of your favorite alcoholic beverage. As you all know in my case that of course would be a bottle of Hefeweizen. A simple Paulaner is one of my favorites – it’s smooth but has that typical Bavarian disciplined but hefty flavor. Simple pleasures…. Well, I hope to see you all next week :-)


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    1. Bear Time
    2. Head For The Beach
    3. Insurance Is Still Cheap
    4. Don’t buy the dip this time
    5. No Crying Over Spilled Milk (Or Beer)
    6. Entries Do Not Matter
    7. Last Chance For The Bears
    8. Three Strikes You’re Out
    9. Binary Proposition
    10. Time To Wield The Iron

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