The Day Risk Died

I’m getting pretty giddy down in my Mediterranean winter lair and you probably know why. The last time the VIX was venturing below its 13 mark was in June of 2007, after which it never looked back, until today! We’ve been through some rather turbulent times since and despite the fact that none of the root causes of the soon ensuing market crash got fixed (quite on the contrary) volatility suffered a sudden coronary today and was unceremoniously buried below the NYSE. Farewell – unlike this silly planking fad you shall be missed…

Okay, let’s get serious – I have no idea what caused that sudden drop to the 12.45 mark today but I like it. Because cheap vega means cheap premiums and those may become mighty useful, no matter which way the tape swings next week. Now if we only had a sign on the price front – something to give us an opportunity to get positioned…

Well here you go, champ – how about a bonafide inside day on the E-Mini? Yes, I know it’s a three day weekend but that doesn’t mean you can’t get positioned as early as Monday night. Now let’s see what this means from a volatility perspective. IF we continue higher and you are getting calls then the punishment you would incur from lower volatility should be relatively contained. After all, another 25% drop from here would get us to a VIX of 9 – quite a different beast then dropping 50% from 23.23 in a matter of 14 trading days (with 70% of that drop in three days).

If we trigger a short on Monday night or on Tuesday and we continue lower then vega should start working in our favor. Even if you are long calls and volatility goes up your premiums should increase, assuming of course price remains level. I hope this is clear – if not I suggest you post pertinent questions in the comment section. We enjoy the company of several resident senior steel rats who are happy to point you  in the right direction.

A word to the wise – despite the low VIX reading I implore you to remain open minded and not jump to any conclusions. Case in point – the SPX/VIX ratio which actually is running sky high right now. Yesterday it was dropping ahead of today’s little early morning correction, so what this may mean is that we’ll see continuation higher. If we get a long trigger next week then that’s what we’ll take – always remember, price is our final denominator. Our charts are only clues that help us the possibilities of what price may do next.

Someone asked me ‘so, how about the NZD/USD, Mole?’ Well, unfortunately I missed that fast drop earlier and was kicking myself. However, turns out we are sitting on quite a juicy setup here. Look at the 25-day SMA touch – very nice, plus there’s a daily NLSL and we’re still above (as I’m writing this). Now, we are below the triangle but there’s now an inside day which may complete intact today. And the triggers are below the NLSL and above the triangle, which would either mean continuation lower or a fake breach which probably would be followed up by a push higher. I definitely like this one and so should you.

More charting goodness below – please step into my lair:

More charts and non-biased 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 or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed (non-recurring) or Zero Data Feed (recurring) or ES Gold (non-recurring) or ES Gold (recurring) or geronimo/ES (recurring) to view this content.

That’s all for today – I hope you all enjoy the long weekend. Remember, Monday is MLK Day and it’s when I’ll be back with some long term perspectives.

Cheers,

This entry was posted on Friday, January 18th, 2013 at 2:30 pm. Both comments and pings are currently closed.



  • http://dartht.blogspot.com/ Darth_Gerb

    DG raises hand.
    my bull friend wants to write some option calls against his equity holdings.
    would the commentary (above) apply to back end months such as April’s?

  • http://evilspeculator.com molecool

    Okay, take this with a grain of salt but when it comes to option my prime directive is: If you have to ask how – don’t do it. Buying some puts (with limited risk) is one thing. Writing calls is quite another. I know he’s trying to do something like a covered call but why not just buy vega and be done with it?

  • itslance

    Any suggestions for ways to go long vega, for those of us with remedial skills?  I always avoid options because it seems no matter what, I get burned.

  • http://evilspeculator.com molecool

    Buy puts (or calls – but that’s obviously not why you would do it). Options are a wasting asset, so always buy at least 60 days out and sell before theta starts killing you (about 30 days ahead of expiration). It’s very useful at inflection points, especially if you think a large move is coming. We don’t know anything yet, so let’s not jump to conclusions. In the meantime you could just get short (or long) the E-Mini and not worry about expiration or volatility.

  • bdoone

    My .02: NO, VIX at 12.5 and sell vol now? If we explode higher vol will contract a little more but delta/gamma explodes w/o collecting enough for the risk. If we drop hard he loses on equity side and calls could remain elevated due to vol pop so call delta decrease is offset. Lose-lose.  Also, we have the debt ceiling bullshit coming up also.
    If he has profit to protect and really wants to sell calls, then I’d do OTM combos: sell OTM calls, buy OTM puts.

  • http://ibergamot.blogspot.com/ i Bergamot

     Why complicate things? If his portfolio liquid, just sell and wait it out. If its illiquid then options will be unworkable (bid/ask too wide), wait and suffer.
    Speaking from personal experience, I managed to shot myself in a foot every time I did covered calls

  • RacerXX
  • RacerXX

    Are there particular deltas you like to be at, or does it depend?

  • itslance

    Thanks for the feedback! :)

  • Rightside_ot_trade

    didn’t stick with my GBP short , out near yesterday’s low, ouch

  • itslance

    VIX and SPX on the move again

  • bdoone

    Relevant reprint of reply to Amazing Larry in last post:
    When I left the the floor as a market maker in 2003 (work related injury if you can believe that) I kept in touch with my MM friends who loved to tell how they were killing it 2004-2007 just doing buy writes and collecting premiums on options and $ on stocks move up and selling put spreads.  Of course traded bigger size as they got greedy with all the ‘free’ money.  Most got hurt but survived beginning of the crisis and gave back a bunch…then almost all got destroyed on collapse…selling vol with VIX at 30-40.  How high could it go after all? Only 80. 
    Conclusion: He could do ok, at 1st, but ‘free’ money in addictive.  He’ll see how ‘easy’ it is until 1 day….

  • http://dartht.blogspot.com/ Darth_Gerb

    so, with the VIX dead.
    what do you think guys?  reversal down Tuesday?
    or just a freaking bull rally?

    [two months ago]
    http://evilspeculator.com/?p=31658#comment-694337618

  • itslance

    Who the heck knows! :)  Moment of truth….1485.16 SPX

  • AmazingLarry

    Word. I don’t have that experience but I can see the attraction and destruction that comes with it. Like I was telling a buddy the other day; those trend-busting “it can’t possibly go higher” rallies are built on the backs of sellers just as the “it’s not gonna crash” wipe outs lay out the buyers. Successful people in general move 90* to the pack. Fuck this noise. 

  • http://dartht.blogspot.com/ Darth_Gerb

    wasn’t Thomas Demark calling for 1483?

  • Joe_Jones

    Loading 1/3 position on VXX before the close

  • Skynard

    ya, trying for a new high.

  • Joe_Jones

    I saw 1492 on Bloomberg 

  • bdoone

    1492 I believe

  • http://dartht.blogspot.com/ Darth_Gerb

    thank you both.

  • http://dartht.blogspot.com/ Darth_Gerb

    clean your books, 3 day weekend ahead.

  • Joe_Jones

    So no inside day on spx

  • Skynard

    No fear, buy,buy,buy.

  • Curiousmind3861

    that last hour ramp is almost too typical nowadays on OPEX Friday. Interesting thing is AUD didn’t move at all with such a powerful ramp…

  • Skynard

    Was bullish through Wed, thought we would see some pressure. Yes, OPX is generally bullish.

  • BobbyLow

    I’ve written a lot of covered calls over the years and did pretty good with them during the energy company bull around 05 and 06.

    But if I could go back and start all over again, I would never sell a covered call.  The so-called extra income isn’t worth the upside risk to me anymore.  And if your position tanks it is going to tank at a 100% Delta while your call is earning premium at a far slower rate.

    From now on, if I’m concerned about long position risk then I’ll just reduce my position size.  Cash is a position too.  

    In theory getting extra income from selling calls sounds great.  But I found it to be more trouble then it’s worth.   

  • AmazingLarry

    Oh shut the hell up. AAPL closed at 500.00. 

    Monthly indicators on the RUT pointed straight up to God in QE? heaven. I need a lobotomy. 

  • BobbyLow

    Must be true then.   :)

  • http://dartht.blogspot.com/ Darth_Gerb

    QQQ’s weren’t exactly a shining example of leadership, either.
    it was the DOW,S&P,NAZ in that order.
    A defensive market clue.

  • grednfer

    R2K at All time HIGH! going to 915….

    VIX?….the Phoenix will rise from the ashes.

  • AMCabrera

    Yup im just quietly sitting in this pair. Short. Its the only pair I hold now.

  • http://ibergamot.blogspot.com/ i Bergamot

     Your big T goes into march, mine into beginning of April. Close enough.
    Have a nice weekend.

  • http://dartht.blogspot.com/ Darth_Gerb

    better out a month early than a month late I say. ;-)

    you too.
    -Gerb

  • http://ibergamot.blogspot.com/ i Bergamot

     No doubt

  • Darkthirty

    Globex is still running?

  • itslance

    So this may just be mental you-know-what, but how high in price do you think we can grind up with the VIX pegged below 13?  The P&F says 1650, and while I realize that it wouldn’t be a straight shot to that target, I find it hard to believe that the SPX would reach its highest level ever with 8ish (according to the U3) percent unemployment and an anemic GDP growth rate.  I guess the reason I’m thinking about this to begin with is, I’m trying to decide whether to move my 401K into bonds now in anticipation of a correction or to wait it out.  Unfortunately, there is a lag time between when request to move funds and when it actually happens.  Any thoughts?

  • newbfxtrader

    Do need to risk it all to get the last 10%? Trying to see what you are thinking. Can you only buy US equities in your 401k? Can you diversify some into real things like metals, commodities?

  • BobbyLow

    Well. . . . .

    As far as a 401K goes, I had to make a similar decision on my wife’s plan back in March.  At that time, the market had run back up after falling down. I had my wife roll everything over from what they called their 2020 plan of a Stocks and Bond Mix into the most stable fund that they had. The new plan was comprised of a mix of Short Term Bonds, Treasuries and Money Market.  

    I took a look at her new plan this week and after all the machinations of the market over the past 9 Months, her 2020 Plan would have outperformed the Stable Value Fund by about a quarter percent.  

    IMO other than company matching funds, 401K Plans are only Slush Funds for Investment Banks and Brokerages to jerk money around in.   

    Another thing that happened was that in the fall of 2006, I suggested to my son that he move his 401K (he had about a $100K) in it to a similar stable value fund.  He missed the last run in 2007 (which got pretty choppy)  but then he also missed the massive haircut in 2008 and is still thanking me today.  

    I suppose one of the best things about being an old fuck is that I was fortunate to belong to an “Old Fashion” Fixed Dollar Pension Plan and I thank my lucky stars for that.  :)   

  • BobbyLow

    Most of Today’s 401K Plans are all designed with various percentages (based on your age) of Stocks and Bonds and Long Term Bonds at that – YUK!   The Choices in both my wife’s plan and my Son’s plan Sucked.  

    Anyhow, I’m punching out for the weekend.

    Catch y’all later.  

  • http://evilspeculator.com molecool

    Yup, I knew a few cats who were playing this game for years. They all got wiped out when disaster struck. There bold traders and old traders – but there are no bold old traders ;-)

  • http://evilspeculator.com molecool

    Ahem – nobody here ever told you ‘it can’t get any higher’. Big market turns don’t come on account of the bears – they come on account of a lack of buyers.

  • newbfxtrader
  • http://evilspeculator.com molecool

    Yeah, you’re thinking too much.

  • http://twitter.com/Automat0n1 Observer

    Yep. VIX going into the ionosphere.

  • http://dartht.blogspot.com/ Darth_Gerb

    I face this decision myself.
    Take a good hard look at this chart in regards to late 2010.

    http://stockcharts.com/h-sc/ui?s=$SPX:TLT&p=D&yr=2&mn=10&dy=0&id=p55414125974
    remember the mantra “never say never”?
    well, yes- cyclically this would be a great place for a reversal (aka bonds)but what if the next few months is up in equities? how? I don’t care – don’t overthink it.  QE5, bond bubble bust, make something up.

    it’s going to be the longest freaking months of your life.(I purposely put up a daily chart, to show you the extruciating day by day torture.)

    short answer, break the binary.think in fractions.
    think in strategy, “if this goes X, I’ll do Y”.
    -Gerb

  • AmazingLarry

    Yes, I know this. I was trying to explain to a friend who’s convinced of direction because he’s listening to the voices in his head and not looking at the data. He didn’t get it was a zero-sum game.

  • AmazingLarry

    Cash. Nothing wrong with the sidelines. 

    And I agree, you’re thinking too much and not listening. You know you can’t trade any economic data. Nothing wrong with looking at it, just don’t make a directional decision because of it. 

  • Joe_Jones

    LOL

  • itslance

    Unfortunately, my company matched 401K only allows me to change the mix of stocks and bonds I’m invested in.  They have three mutual funds that are classified by Growth, Value, and a Blend of both types of stocks with minimal exposure to  bonds.  On the flip side there is a stable fund, which is a collection of bonds and treasuries.  No commodities.

    I don’t feel the need to risk it all to get the last 10%, which is why I was leaning toward moving my money to the Stable Fund now.  What’s holding me back is wondering if we are just going to get a shallow correction or if this is the new normal and things are just going to continue to ramp for the next 3 months with the VIX below 13?  I remember what happened during the last QE because I kept getting my arse handed to me trying to short the market because it didn’t make sense to me that things kept going up.  Then I started reading mole’s posts on a regular basis and changed my perspective.

    I guess the question that I have been racking my brain over is how long can this equity bubble keep going?  Is this the end of the cyclical bull market and the start of the secular bear market that Fearless predicted some months back?

  • itslance

    Sage advice, and that’s kind of where I’m leaning toward.  With my trading funds, I have remained largely in cash and taken on small intraday positions.  With my retirement account, I have been in stocks since 2009 and have done a lot better than my trading account.  I’d rather not give those gains back.

  • itslance

    I know, I know….like you always say, let price tell you the direction and don’t choose sides.  I’m fine with doing that with my trading account, but I get a little more skittish about my retirement account.  How do you distinguish between the two, or do you?

  • itslance

    Thanks for the thoughts and the charts DG!  I vividly remember what happened in late 2010….in fact, it still hurts every time I sit down. ;)

  • itslance

    Thanks to everyone that responded!  You guys are great!  I really appreciate that you take the time to help field my remedial questions and give me advice!  :)

  • newbfxtrader

    We are definitely going much higher. When you have all doubt gone then we can talk about the bear market! However in the short term its risky to bet on a melt up scenario. When in doubt look back in history.
    http://www.hussmanfunds.com/wmc/wmc130114.htm

    My advice. Go to cash and buy the next dip. Maybe April/May or when ever that comes.

  • Skynard

    Moved all my LT to the sidelines for now. Four year cycle is near complete but will consider repositioning if we get some pullback.

  • captainboom

    Nice VXO chart, thanks.  It’s pretty easy to see why Fearless uses VXO above 50 as a peak in the ‘fear index’, and an indication that it’s time to consider going long for a long term trade in equities.  As I recall, VXO above 40 can also be useful.  Here is Fearless’ post where he references VXO above 50.

    http://evilspeculator.com/?p=24292

  • convictscott

    One simple way is to never look at daily charts for a retirement account. Look at monthly charts only for long term decisions

  • http://dartht.blogspot.com/ Darth_Gerb

    he LIVES.

  • convictscott

    I do. I spent the last year running a business in the Philippines, a place which I hate, doing stuff I’m not passionate about. I realised that I make a good living trading, and its what I am best at. So I’m spending a few months getting in sync with the markets again, testing some new ideas I have for setups and trade management, and I’ll be back posting (Mole willing) in short order

  • Joe_Jones

    Glad to see you back Scott. Still a free man I presume? ;-)
    Don’t blame you for fading the whipsaw. Anyway, things are about to get a lot more interesting very soon.

  • Joe_Jones

    [JJ backflips] Yeah!

  • newbfxtrader

    I wish I had your skills.

  • convictscott

    Spend thousands of hours of focused practise. Anyone can trade.

  • newbfxtrader

    I know its hard work. But most of the time I am fighting myself. When I see something overbought I still want to short it and vice versa. I thought I was getting better but the past two weeks been back to the old game of trying to short something extremely overbought (eg aud/jpy).

  • BobbyLow

    Welcome back Scott!

  • Th3_Acist

    It’s an MLK day miracle…

  • http://evilspeculator.com molecool

    I had to call him out.

  • http://evilspeculator.com molecool

    Fu…ing A!

  • AMCabrera

    well well.

  • Skynard

    Sounds like an awesome experience, nice to hear!

  • badflightrisk

     All the beaten up sectors over the last two years have had good bounces and banks have had a nice run.  Whats left?
    Weekly volume on TVIX tells a good story. 

  • Skynard

     Shorted /ES 1483. Low volume ramp it seems.

  • captainboom

    Flying without the Zero today?  Looks like it’s not running.

  • Skynard

    Yes, kinda bored! This dollar strength seems to be putting much weakness on all major currencies. Think the futures close early today and will be positioned for tomorrow now.

  • Skynard

    That /DX IH&S looks about ready.

  • Darkthirty

    Game on @ 1700

  • JackSparow

    A little more to go? maybe a close 80.25 would be convincing.. just a thought

  • ridingwaves
  • Skynard

    Needs to get above that 25 on the weekly. Div looks to be coming in to play here.

  • Skynard

    Whoa, that a jump:)

  • http://dartht.blogspot.com/ Darth_Gerb
  • newbfxtrader

    Possible but Bernanke wont like it one bit. Europe is a mess but UK is messier. Short GBP better trade me thinks.

  • newbfxtrader

    @sky remember BOJ meeting today. Dont go crazy on /6J.

  • http://dartht.blogspot.com/ Darth_Gerb

    GBP, have you noticed the pattern?
    http://s14.postimage.org/tjmp7u2jz/temp1.png
    EDIT: if lower support holds, it will be back up 1.62 by Spring.

  • newbfxtrader

    Yep. I will cover at 1.57 then wait for a break down of that wedge.

  • http://dartht.blogspot.com/ Darth_Gerb

    the forex calendar says ‘tentative’.  what does that mean!?

    http://www.forexfactory.com/calendar.php

  • Skynard

    Like AUD, NZD (double top) shorts. GBP tagging the lower BB now on the daily.

  • newbfxtrader

    Well they hold meetings and take their time. Its not a fixed time. But if BOJ says anything less than “unlimited” I think the yen could rebound.

  • Skynard

    She’s going to blow me thinks, Would be very surprised if this thing fails.

  • newbfxtrader

    Most likely. Still they will likely take out your stops on the downside before the bus takes off. Usual shenanigans apply.

  • JackSparow

    gotcha you

  • Skynard

    Lol, more than likely. Could be a nasty squeeze with markets extended like they are.

  • Skynard

     Still long /SB, If the 18.31 low is taken out will short it.

  • newbfxtrader

    I am staying short with the lumber. It may be done on the upside for no.

  • Skynard

    Agree, seeing good signs.

  • JackSparow

    long term looks like a cliff dive yet to hit water/land? :)

  • Skynard

    Yes, it does!

  • JackSparow

    this worries not a bad trade but would be out in a jiffy if 18.31 breached.. 

  • JackSparow

    missed the chart.. here you go

  • JackSparow

    SB chart

  • Skynard

    Agree, yes. Will flip it:)

  • AmazingLarry

    What do you guys make of this? Large specs reducing their shorts and the commercial specs reducing longs. Looks like in the past that was a sign of a reversal?

    Weekly 5 year Yen 

  • newbfxtrader

    Yes but thats been going on for several weeks now. That could mean commercials covering. Price never recovered. Actually that is a bad sign as after a rebound the trend will resume. Thats how I read it.

  • newbfxtrader

    Yep. Long way to go on the monthly. Looking something like 1995.

  • newbfxtrader

    For example think of like crude during 2008. Large specs keep selling it down and some point the price gets so low commercials will have to cover. Still the price keeps headed down. 

  • http://evilspeculator.com molecool

    ¤ø„¸¸„ø¤º°¨¤ø„¸¸„ø¤º°¨ 
    ¨°º¤ø„¸  N E W  „ø¤º°¨ 
    ¸„ø¤º°¨ P O S T “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸





    Zero Indicator

  1. poll

    • What is your average spread on the EUR/USD?



      view results

      Loading ... Loading ...


  2. search warrant


  3. recent misdeeds

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




  4. yes we can!



    NinjaTrader
    Kinetick