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Three Little Pigs
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Three Little Pigs

by The MoleMay 26, 2010

I’m watching today’s gyrations with keen interest. Based on what I’m seeing there are three scenarios – two high probability and two low probability ones – I call them my three little pigs as they all have the same eventual outcome:

Post now free for everyone:

Let me precede the following with a warning: Counting Minuettes is a bit of mental masturbation – just too much tape banging going on to count on such small scale. Which is why I usually don’t but today’s an exception so I’m throwing this at the wall – not sure if it’s going to do you any good but seeing various possible scenarios may aid your trading decisions. But remember, all this is short term stuff, so don’t sweat it.

Anyway, right now we are either done and drop down from here and then complete this motive (Blue) or we drive higher and complete right away. There is a chance that we are done altogether (Green), but that would be one fast correction and would lead to Soylent Red (i.e. the continuation of Minute {3} and a very fast plunge). Sorry for not keeping the colors in sync – but I’m sure you get the gist of it.

The odds right now support more upside for at least another day or two – for one there are playing some evil games in the options pits right now (see below) and then there’s the NYSE A/D ratio which is firmly bullish as I’m typing this. Except for that spike on the 10th ‘s been a while since we saw such a high reading.

Ouch – just looking at those charts hurts if you are an option trader. Early this morning we painted 24 on Mr. VIX – and that’s three days after a spike to 48. Wow – a 50% drop in volatility – folks, that is HUGE and if you sold vega last Friday and bought it back today you made a little fortune.

But it doesn’t end there. Check out those juicy spreads in the Spider Dec 10 options chain – a highly liquid instrument I may add. We are talking 10%+ on far OTM puts. Nasty!

Market makers got screwed in the past few weeks as they completely miscalculated their risk exposure. And they are in no mood for games these days – the gloves are off! Which is another reason that I keep telling you guys to simply stay in the game long term. Chasing things up/down is a dangerous game and often you get left behind – trust me, I have learned this the hard way. Even if you manage a higher re-entry, the spreads may be so far apart that you are paying a huge price just to get back into your puts. Of course had you done it this morning you may have been more lucky.

If you are looking to reload you better pray we are done correcting here and push yet a little higher. As long as Mr. VIX is at such high levels buying puts is an expensive endeavor. But you know what? It’s about to get a lot more expensive – you just watch…

UPDATE 2:30pm EDT: A little warning – after seeing this I must upgrade Soylent Red to a 50% possibility:

EUR/JPY is pushing down while equities are pushing higher. I don’t think this is going to end pretty. Even though we may get more upside for another day or two I would recommend reloading right now while the picking is good. Momentarily they may depress Mr. VIX to new low levels, and that’s a risk we’ll have to live with. The bad news is that it’s back up to 32 right now – but hey, the good news is that it’s down to 32!! πŸ˜‰

It’s just a matter of time until we turn back to the dark side. The market is pretty jumpy here, the Zero is flat as a flounder and that’s usually not a good sign. Pick your poison – mine is to stay exactly where I am – long term short.

UPDATE 3:06pm EDT: Here is some mental masturbation – please don’t worry about this if you are long term positioned:

That’s the scenario if we breach above today’s highs. Could happen – or it could not – just wanted you guys to know ahead of time. Frankly, the tape is so on edge right now that it’s almost untradeable. Gaps all over the place – just look at this chart! But if the bulls manage to push this higher, preferably by the EOD (or overnight if the MMS are really insidious) we are looking at a 111 target cluster on the Spiders.

I hope I don’t come across as all over the place today. FWIW – I keep saying the same thing over and over again: Stay short and if you’re playing the swings this is not a bad time to reload a little – even if we push higher. No guarantees – ever – and especially not in this market.

Cheers,

Mole

P.S.: In case you wonder why I call them all pigs. Well, in the end they all get slaughtered πŸ˜‰


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • momac

    No wonder my account is so far in the dumps, I hadn't paid any attention to the vix. Thanks for the update

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    Boss Mole if you are there, would you like to comment on a particular EW point?

    Orthodox tops, and why the fat finger 5 of may could be a iii of 1 and we can be in wave 4 that must not go beyond 1095….

    and why w5 would be no shorter than 110 points, more likely 180 or even more

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    talking of vix, did anyone notice that the 24.1 was ERASED? never happened as far as stockcharsts is concerned, anyone else on other feeds?

  • http://evilspeculator.com molecool

    Did you actually READ my post??

  • http://evilspeculator.com molecool

    No shit! Wow…

  • http://www.mylifemytrade.com MyLifeMyTrade

    NQ weak as dog.. fuck,.. should've seen that earlier.. We are going down baby πŸ™‚

  • http://www.mylifemytrade.com MyLifeMyTrade

    To me also, 24.1 seems like a bad type

  • http://www.mylifemytrade.com MyLifeMyTrade

    crazy day.. NQ at breakeven.. TF up 1.5%… wierd day.. not sure what to make of it

  • Onorio

    Bad news for the Bulls…EUR just took yesterday low

  • n2thezonez

    I noticed it this morning on ToS charts

  • http://www.mylifemytrade.com MyLifeMyTrade

    Folks FYI Euro could be weakening because Trichet may announce rate cut tonight…

    If this happens then Euro may go down AND equities may head up… And after a bit, Euro will head up too…

    Announcements like the one to made tonight can disrupt the correlations.

  • http://www.mylifemytrade.com MyLifeMyTrade

    In this bear move down, losing VWAP has been fatal for ES on every occasion.

  • http://evilspeculator.com molecool

    That's the way I see it – and we are even below the lower StdDev line now – could get ugly in a jiffy.

  • http://evilspeculator.com molecool

    Yeah, and pigs may fly. I just care about my charts – has served me well thus far…

  • gsavli

    Try to make money of it.

  • http://www.mylifemytrade.com MyLifeMyTrade

    Not questioning your charts.. I like your EUR/USD chart. I Just wanted to give everyone a heads up…

  • EvilTrader

    sems like another fright night again on ES.

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    Here's a big picture chart on the SPX 15min:

    http://www.screencast.com/users/springheel_jack

  • Clint

    This could be an interesting hour.

  • tradingmom

    I love it when I refresh the screen and the new small sized chart suddenly brings clarity….ES in a nice, gently trending down channel all day long.

  • gsavli

    on the other hand. NQ went out of the channel briefly to test the resistance at 1850, failed, then returned to its channel:

    http://www.uploadgeek.com/share-BDC7_4BFD61A1.html

  • BobbyLow

    And they said this shit was going to be easy.

    http://www.youtube.com/watch?v=WOKDK0g1Gno

  • raised_by_wolves

    XLF*($TRAN/$UTIL) is what I'm watching. No breach (yet); therefore, no holding short (yet).

    http://content.screencast.com/users/raised_by_w

  • http://channelsandpatterns.blogspot.com/ springheel_jack

    Today's declining channel on ES:

    http://www.screencast.com/users/springheel_jack

  • bananaben

    Great shit! Stewart looks and sounds like a young Cramer if he cleaned himself up a bit!

  • raised_by_wolves

    There's Mole's 38.2% still a fib's level distance away.

    http://content.screencast.com/users/raised_by_w

    Let's see how this plays out.

  • katzo7

    I agree, coming soon to a theatre near you. Too many bullish charts abounded last night.

  • BobbyLow

    And what's really great about that commercial is that they are buying KMART! LMAO

  • http://www.mylifemytrade.com MyLifeMyTrade

    NQ red when TF is big green and ES is green can only mean one thing… BIG SHIT is about to hit the fan

  • Onorio

    Well after hit the 1090 wall for the 3rd time in the last 4 days now what? down again?

  • katzo7

    watch what happens next, seen this movie before.

  • http://www.mylifemytrade.com MyLifeMyTrade

    TOS just played the “thud” sound for market falling off the plate..

    Bulls are in the game till 1066 btw

  • nyse

    DVOL going nuts

  • katzo7

    potential for MACD on the 120 to cross and cross zero at roughly same time, if so . . . . .

  • Wave_Surfer

    Hm.. so is the end of the downward correction or just the start of the down movement.
    I am trying to decide if I should turn my July Puts into a spread before the day ends or if I should leave them unhedged.

  • Clint

    Here's your BRD !

  • raised_by_wolves

    This fib's broken. Now watch the other one for confirmation.

    http://content.screencast.com/users/raised_by_w

  • FranceHasTheBomb

    What movie is it? Nightmare on Wall Street?

  • katzo7

    Mole, did you see those wild as charts last night with bull predictions. I looked at those and said WTF? No EW three ever looked like that.

  • Wave_Surfer

    Hm.. it seemed the market was answering me as I was typing that.

  • Clint

    A few long scalpers had their lunch stolen and eaten today.

  • Onorio

    what`s the best ETF to short SP? 1X only please. SH?

  • http://evilspeculator.com molecool

    Glad I reloaded where I did πŸ™‚

    Meh, I was lucky – could have easily gone the other way.

  • http://evilspeculator.com molecool

    SKF? But be careful trading that long term.

  • http://evilspeculator.com molecool

    Which charts?

  • equity_momo

    Thats x3 no? SH is the best x1 inverse of the s+p basically.

  • Rayden

    Guys: after watching the action in long term, far otm puts during the recent decline, I am starting to question their utility for maximizing profit from Primary 3 (if that is indeed the scenario we're in). The fact is, until they become closer to the money, or closer in time, the only people who want to own them are you and me, or in other words, people who believe in P3. And people like that generally want to buy at the same time and sell at the same time, viz today, because we are all watching the same charts. For ES Dec 2010 700 puts to trade at 20 last Wednesday (ES 1080), 20 yesterday (ES 1050) and 11 today (ES 1080 again), this reflects a fatal flaw in the plan. I think last Wednesday was a major volatility short squeeze; now it's over, and there are basically no volatility buyers. If you were in those puts, you would have essentially made no profit from the move 1080 down to 1050, and you would have seen all the profits since 1115 or so erased in the recent bounce from 1045 to 1085. It sucks to be right and not make money.

    I would appreciate any comments about why I'm wrong about the usefulness of long term far otm puts, or suggestions about what to use instead.

  • Rayden

    Another interesting question is of course who is (net) selling these. They are almost impossible to hedge, either as spreads or against underlying. I'm guessing GS, or Buffett? πŸ˜‰

  • momac

    sh = 1x
    sds = 2x
    spxu = 3x

  • Wave_Surfer

    I think the idea is to buy it while the cost is low b/c of VIX and then to hold it for over a half year and sell it when it is no longer a long term option and when it has lots of intrinsic value.

    So, buy low and sell for 5x, 8x, 10x, 12x much later.
    At least that is my understanding of the approach.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    free-loader here, will read ASAP(ossible)

  • WTFed

    Mole-

    When you talk about “no signal” on the ZL, what are you looking for, a +1 or -1 reading?

    Thx

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    we'll doji and break in earnst in the morning

  • nyse

    True, they are hard to trade short term for small moves, however if you can stay neutral (say, with a straddle) you can profit on large moves. The puts are good because they get the benefit of increased vol when the underlying moves in its direction. The reason the profit went away is because vol dropped so much. Thats why its important to understand the “true” price of the option, not its dollar price per se.

  • katzo7

    I saw a chart here, and some elsewhere (identities protected), that prompted this chart I posted here, along with Prechter's recent bullish call. Wild ass moves do not happen in an EW3 like this, they pretty much stay in the channel.

    http://www.screencast.com/users/katzo7/folders/

  • Clint

    I just hope this doesn't keep us in a very tight trading range now the rest of the summer. 10,000 + or – a 100 points for the next 3 months. Yuk !

  • tradingmom

    Thats right.

  • vision_invisible

    Option values are going to decline going into the summer period. If you believe that a long deflationary collapse will ensue with no attempts to shock the patient with continual injections of ungodly amounts of liquidity and the twin brother, the austerity whip for the plebians…then go ahead during the summer (imo).

    Another way to play this is sell options on great companies. For example, in the height of the panic this week I sold RIM $35 put options OCT for $1.6. Bought them back today for $1.1. I would be happy to go long RIMM for $35 – P3 or whatever is going on. A good way to play this is to perhaps buy those “lottery ticket” options and then sell options to hedge your bets.

  • Rayden

    Hmm, I wouldn't call a 12% move in SPX over 9 trading days a small move, LOL.

    Yeah, I understand about vol dropping. In this case, it was mainly that vol skew dropped dramatically though. And that is primarily due to the fact that this is a very small market and everyone in it wanted to sell rather than buy.

    “True” price is whatever you can buy or sell it for πŸ˜‰ If you think an option is too cheap and you buy it but it drops further, then you lost the opportunity cost of buying more at a lower price, no? I at least operate on a strict MTM basis.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    well, misjudged the bull's ramp into close, i'd accept a doji for reseting my fast rat … lazy still has some to fall, so does r(at)si, so we might gap down and then try to shake hobby bears

    one thing worries me, they held 1066….

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    “Hmm, I wouldn't call a 12% move in SPX over 9 trading days a small move, LOL. “

    You will, the moment they lose this, you will….

    Ask me how low we go if we break 1020's

  • Rayden

    wtf is this wave? c down of b down of an abc up from 1040? a bit confused here… it is fast like some kind of third wave, seems to be an impulse, and possibly started as a 1-2-1-2 from the top.

  • Rayden

    ok πŸ˜‰ how low?

  • katzo7

    Look at the MACD on the 120, then you will know.

  • captainboom

    Almost looks like an iH&S forming on SPX, if we don't trade too much further down tomorrow.

  • Rayden

    That's rather cryptic. 120min chart on the SPX with MACD, and what am I looking at?

  • katzo7

    Sorry, possible MACD will cross (bearish) and then cross the zero line subsequently (very bearish).

  • katzo7

    ES continues declining in AH trading.

  • http://evilspeculator.com molecool

    Easily answered and it's by looking at the VIX chart. They are always playing games in an attempt to shake out the hobby bears. Today was a great example. I know that the option game is tough – I bought my Dec puts in Jan/Feb and they were worth jack shit just over a month ago. Then exploded again on the way down – I'm above my entry premium now and then some.

    As we continue down volatility is going to go ape shit – there will be big swings like today but higher up. If you bought puts while Mr. VIX was around the 20 mark you should be looking pretty right now AND THE MOVE DOWN HAS BARELY BEGUN!

    I'm looking at the SPX at around 650ish by October, maybe lower. That's when I cycle out of my puts – and reload a month or two later when we complete Intermediate (2). It'll be fun guys – but yes, you need a plan. Remember my post from about one year ago? When I showed you those SPY puts which were bought for around $4k and turned into over 100k near the bottom of P1? That's the type of repeat I'm looking at here.

    Of course if you simply go short the futures you don't have any of that to worry about.

  • http://evilspeculator.com molecool

    I never trade any of them as I hate short ETFs and especially double and triples. Rather play my option games.

  • katzo7

    ES now at 1061.
    Also this AH decline cements the MACD cross I discussed.
    ES should have stopped and turned higher in correct EW form around 1066 (120 min.). It has two spinning tops and a doji on it, major indecision.

  • http://evilspeculator.com molecool

    With all the time you spend here that's surprising!

  • psycho_puppies

    What are “hobby bears”?

  • http://www.mylifemytrade.com MyLifeMyTrade

    All the other sell offs have resulted in huge negative signal on ZL.. This one didn't – what did you make of this?

  • http://www.mylifemytrade.com MyLifeMyTrade

    hobby bear – an endangered species who love to lose money by shorting the market at the bottom

  • WTFed

    Puts on ES or straight up puts on the SPDR?

  • Clint

    Today was a real barnburner. Brutal. It almost was for me. Almost loaded up on SPX calls thinking we'd rally into the 3 day Memorial Day weekend.- Once in a while procrastinating ends up being a good thing. Not often…but once in a while.- So of course….Now What ?

  • Bob the Horse

    I made a comment on this issue a few days back – basically you have seen a massive short squeeze in vol last week. Several desks on the Street got heavily short vol and have been taken to the cleaners. Rumour is Soc Gen took a major. That was one of the reasons I was bullish – it appeared the vol squeeze was over but this has not yet transitioned into a bg rally – although we are still not making S&P lows or VIX highs to be fair.

    Anyway, the options you have have a very low delta so the option price is going to be more sensitive to the vega at the moment. I would not expect them to start making serious money until the market breaks 800. You are playing for the BIG one with those puts, if you want to make money here and now, you will need closer strikes.

  • Onorio

    Bulls think that this is only a pullback, ZL will bust your lower screen when 1045 is taken. LOL

    The correction option is still valid, but the fact that EUR broke yesterday low doesn`t look good for the bulls.

  • jigdaddy

    i bought a the top and am waiting patiently. hopefully the 10k i invested will turn into a 6 figure number… patience daniel son…

    how about a zero iphone app πŸ™‚

  • http://chartsandthat.blogspot.com/ ultra

    USDCHF possibly topping here – nice short-term set up

    http://tinyurl.com/33vrt47

  • Bob the Horse

    often happens – it's just a bad print.

  • spudthorpe

    Mole, you can often get away with paying MUCH less than the quoted spread on option trades. I mainly trade SPX options, and I often see quoted spreads as high as, for example, $4 on a $40 option. In thousands of trades, I have never once had to pay the quoted spread. Usually I get away with a spread of just one or two ticks (i.e. $0.10 or $0.20 on SPX options).

    ALWAYS, ALWAYS use limit orders on option trades. Look at the quoted spread, split it in half, move one tick in the market maker's favor, and on liquid options you will virtually always get an instant fill. If not, move another tick and try again. If you don't do this – if you enter market orders, or limit orders at the quoted bid/ask, you are handing away an enormous amount of money to options market makers.

  • amokta

    yeah, i used to put market fills, and was 'cheated' recently. then i put limit orders, but one penny above the ask!

  • spudthorpe

    Let me add another options-related point I've made here before for the benefit of anyone who may have missed it. Cash-settled derivatives (including futures and index options) are taxed at 60% long-term and 40% short-term rates. Equity options (including SPY options) are taxed based on holding period. If your holding period is less than a year, SPX options give you dramatically preferential tax treatment compared to SPY options.

  • anoopsan

    RUSSELL 2000 TREND LINE BREAK TRADE

    http://niftychartsandpatterns.blogspot.com/2010

    Thank you

  • jacksoo

    worth a short on a break of 58 katzo?

  • MDX

    Thanks for the Zero e-mail Mole!

    Noob.

  • Rayden

    hey spudthorpe – awesome, another SPX options trader! what dates/strikes to you usually trade? i hang out in Dec and beyond, usually low strikes.

    i wonder about one thing btw… i see no market depth, and the quoted bid/ask are of course ridiculous. i guess the bid ask would make sense for a 10k block trade, but a mere 100 contracts? lol. how exactly does it work that we get a fill around the midpoint? someone sees your trade sitting there and decides whether to hit it i guess? (usually takes a few sec in my experience) is this automated? is it an official/designated MM or just some random exchange participant (or prop trading firm, etc)? how does it work when it is a huge block trade? i've never actually *seen* a big block at sitting bid/ask not even for a millisecond, but i've seen them trade through all the time.

  • http://chartsandthat.blogspot.com/ ultra

    EURJPY weekly – http://tinyurl.com/39av4ye

  • bananaben

    It would help a lot of us if you could update your big picture chart for P3 (assuming this is it – I certainly believe it). 650 by October – holy shit!

  • nyse

    How can you tell if an option is cheap or expensive? When I mentioned the “true price” I was referring to the Implied Volatility. IMO, the sooner you can focus on that (and thus realize that the dollar price is a result of the IV), the better you will be at figuring out if an option is overpriced or underpriced. When you are viewing option pricing and volatility properly, you can also then see how the term structure of volatility will influence options of varying maturities. (a portion of the term structure can be be seen by at some level by comparing VIX to VXV)

    In general, the best way to profit from long dated puts is to take advantage of what you're paying for – i.e., Time – and hold them for a while. True a 12% move is nothing to sneeze at, but check those options once we test our lows in the 600s (as I believe we will before December).

    If any of this is unclear, please let me know; I'd be happy to share what I know and what I'm learning about. If you are serious about trading options though, I would highly recommend getting a copy of “Option Volatility & Pricing” (Natenberg). It is a well-respected book and will teach you how to think about the pricing of options in the right way. My trading has improved dramatically since reading it.
    http://www.amazon.com/Option-Volatility-Pricing

    Last wed, the VIX got at high as 38 before closing at 35.4
    Yesterday it got at high as ~44 and closed at 39 (so higher vol, but also rising spx)
    Today, it closed at 31

    The name of the game is volatility.

  • http://www.mylifemytrade.com MyLifeMyTrade

    I uttered the same 4 syllables when I read 650 by October.. I don't think even Atilla's end-of-world playbook is that evil.

  • katzo7

    Here is what I think.

    http://www.screencast.com/users/katzo7/folders/

    1) ignore that flash crash in your calculations, it was an anomaly, use the next DAY candle. But I did say this move was a trial balloon and we would revisit.
    2) Oscillators do not end in this way.
    3) today was a nice try bulls but no cigar, failed EW4 attempt
    4) when I am not sure I turn to longer term charts
    5) rallies have been mightily thwarted, this is IMO an EW5 on the WEEK (this will last a long time) , and an EW 3 on the day
    6) the market is very very volatile, large swings will happen both ways, hence higher VIX (200 DJIA points today). It will try to rob bulls and bears, it is an equal opportunity employer. lol

  • http://www.mylifemytrade.com MyLifeMyTrade

    WOW – people really want out of ES before 5:30pm Lock down.. Major dump in last 1 minute – we dumped 4 full points in 1 minute. Crazy

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    It was always a away of repaying what you gave, i have non-intraday timeframes and for the moments I want to check it I had to discover something for myself (lazy hamster, fast rat, etc)

    As for the wavecounts they sometimes came as soylents and less as counts, I enjoyed them but my trades (and responsability) were always my own

    but I do respect you a lot and think that most people would be buying one fine brain when they use zero and follow your scenarios

    best regards boss… i'm just the janitor πŸ˜‰

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    ball-less bears that can be shaken out by the bulls, not hardened traders that have their values and scenarios carved in stainless steel balls

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    don't think so… the value was … congruous

  • amokta

    even i held onto shorts (despite being exasperated at open)

  • amokta

    futures dipping dangerously (i know they can move around)

  • Rayden

    nyse – I totally get implied volatility. Been doing this for a while. Did what i wrote sound that newb-ish? Fooled ya πŸ˜‰

    What i meant is that the effects of changes in IV are completely overwhelming the effects of moves in the underlying, and in this case in a very non-useful way. Btw, VIX is not a good guide for the IV of the kind of option i'm talking about: you have to think about the ATM IV for that date, and then about the IV skew. These can and do move in ways independent of the moves in VIX.

    In this instance, ATM IV for Dec options dropped a bit, and IV skew dropped a *lot*, as we were nearing what is presumed to be the end of minute wave 1 (1040-ish). This simply reflects supply and demand: people like us who think P3 is possible would all have bought those kinds of puts a while ago and would be generally selling now rather than chasing them up; and people who don't believe in P3 but are concerned about hedging a long stock portfolio would be using collars or similar in the front few months using options that are only slightly OTM. No doubt, if we get a large rally, IV and skew for Dec options will increase again as we decide to load up on them. This makes them very unsuitable as a vehicle for trading in and out of. They *may* be suitable as a “hold until they become ITM” vehicle, but that was not my intention πŸ˜‰

  • Graphite

    MM's usually are fitting a curve and have the theoretical value somewhere inside the spread. Quoting with limit orders can be dangerous because you can get run over on major market moves, so they might set their program to quote with 3 points of spread on either side of the theoretical value. However, most also run “electronic eyes” where they are looking for resting orders that are through those theoretical values; so, if they can hit your bid for an immediate 1 point of edge, it will trigger their option eye and your order will trade.

    There are also manual traders who are watching a screen full of strikes in every month. Lots of those guys are trading in the OTC market where a lot of the volume in the back months is executed. If you bid through their theo values or offer through their theos, it will trigger some visual flag for them (like a red box next to the strike). If hitting your order makes sense (maybe they have a position on in that strike and trading with you helps them flatten it up), they will click trade it.

    Never ever ever ever use market orders with options.

  • Bob the Horse

    Lot of option machismo going on tonight. I have a question for you all: How would you use a vol au vent?

  • BobbyLow

    Wow I can see writing a spread with low strikes could be a problem both short premium wise and trying to control Vega. I didn't realize you were trading the ES. However, I guess the principle is still the same except for the possible tax structure as Spudthorpe pointed out.

    Call me crazy, but I added another 4 Contract Spread today where I Bought 4 December 105's and Sold 4 December 95's. My net cost for this Spread was $1,446.

    So in the most simple terms, on this Spread I'm risking $1,446 to make $4,000 or a Net $2,554 if SPY is trading at 95 or less on December 18th. Because I was able to leg into my other SPY Spreads the net costs for them are close to 0. So I figured I could afford to bite the bullet on this one. Also if we get any substancial rally, I would not hesitate to cover my shorts and add more to the long put side.

    Now the net added Vega on this transaction was an additional +.04 per share and an additional net (- .14) Delta.

    Of course I could have waited for a big rally and bought Puts then and then wait to leg into a spread. But I got real lucky on the last two spreads so I didn't want to count on getting lucky twice in a row.

    I also realize that I could make a hell of a lot more money by just buying and holding the puts without selling a spread. Unfortunately as bearish as I am, I still have to account for all the risk and losses that I've taken over the past year. So I'm playing a little close to the vest as they say.

    I will look to add even more Spy Puts especially on any kind of a substancial rebound. But I am slowly trying to rebuild my account and the bottom line is that I've got to tread carefully to ensure that I am able to survive in this nasty business.

    If you or anyone wants to critique what I did, please do so because I'm always looking for ways to improve my game.

  • funkypenguin

    Agree – Selling AAPL puts has been a big money maker for me. I Like AAPL because at least it has fundamentals to back up it's stock price (or at least to some degree). Every dip in AAPL gets bought When they can take AAPL out, this market is really going to fall.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    why did you hold? what count or scenario or indicators? whaqt's your timeframe? we had a rebound underway…

  • katzo7

    I just got an EW3 bottom at 890.85 S&P based on the LOD on the day after Flash Crash candle to be conservative and a 1.618 multiplier, meaning that if market listens to me, there will be no EW4 retrace until we get there. I am surprised with Prechter's comments yesterday, he knows better. . .

    BUT intraday this market will try to shake you out every attempt it gets.

  • OldChicago

    What's happening at 5:30pm?

  • Rayden

    Graphite – Thank you, this is extremely interesting. I always want to learn more about market structure, you know the saying “if you don't know who the sucker is, then it's you” lol.

    “Lots of those guys are trading in the OTC market where a lot of the volume in the back months is executed.” – OTC for index options? are those cleared/reported on the exchanges, or completely opaque?

    “Quoting with limit orders can be dangerous because you can get run over on major market moves” – gotcha, so the quoted spread is basically a function of how large a sudden move the mm's want to be protected against, not how much edge they want to have.

  • amokta

    well they are long term puts (risky to close & miss out on major down)

    yes, just reading ewi stu today -they say “it is unlikely that wave ii (circle) is complete in just a day and a half, but break under yesterday's 1040.78 low, confirmed by the Dow, will suggest that the decline from May 13 (1173.57) is not over and the potential will increase for acceleration lower.”

    i cant complain – i have had every opportunity to close some puts, and i suspect even tomorrow will be opportunity to close, as probably will open low/flat.

    but the fact that the tape is weak, i am tempted to holod while overall things moving down – unless you tell me we will retrace to 1090-1125 for sure in next few days

  • gsavli

    futures traders get to pee and finish that pizza from yesterday. they have half an hour to do this.

  • Clint

    Trying to watch Cramer here for a few minutes. Can't take it anymore. That dude is dangerously F.O.S. !!!

  • Tronacate

    Very nice chart…….keep them coming……..simple………no wave stuff…….easy to play

  • OldChicago

    I have been watching beta. The strongest one – BIDU has turned south since open. It did better than SPX in the past few weeks, but caved today. Let see if there is follow-thru. This could be a sentiment change.

  • convictscott

    Thats great advice mate!

  • Tronacate

    I would assume everyone used this bounce to reload on puts and/or go short?

  • Tronacate

    BXP
    expecting gap fill and drop to lower tl….

    http://content.screencast.com/users/trona/folde

  • Tronacate

    The sentiment change occured with the weekly outside reversal at the top imo

  • Graphite

    I'm not sure how the reporting works on OTC index options. They can be cleared through the exchange, but I'm not sure if those trades show up in the volume/open interest.

    gotcha, so the quoted spread is basically a function of how large a sudden move the mm's want to be protected against, not how much edge they want to have.

    It's really kind of both. Having more edge naturally protects you against a lot of things … a sudden market move, a sudden move in vols, getting hit on your quotes and putting on a big vega or skew position that you can't hedge effectively, etc. And besides all that, MMs naturally love wide markets — why would they quote any tighter than they need to in order to lure in the market order monkeys? πŸ™‚

  • Graphite

    One other note: the less liquid the options are that you are trading, the more likely it is that no one is running any electronic eyes in them, because automated trading gets more dangerous in thin and illiquid markets. Those markets are more likely to have actual human beings sitting there scanning for small orders to pick off, so it can take some time for even an aggressive bid or offer inside the spread to get filled. This is very common in commodity futures options right now.

  • Graphite

    As an hors d'oeuvre?

  • OldChicago

    Lucky they got to pee … haha.

  • Tronacate

    Cramersanasshole

  • Tronacate

    Nice

  • n2thezonez

    Extraordinarily negative action.

    We saw a reversal on Friday. There were reasons to be skeptical (op-ex, last 15 minute stick save), but it was a reversal. It registered a Fail on Monday.

    On Tuesday, we saw a textbook reversal. That registered a Fail today.

    The bottom in February, saw a hammer reversal and the following day the rally did fail. Perhaps that will be the case again tomorrow, but bullish money has to be very unimpressed by the price action, the questions in the currency and credit markets and the general lack of buying interest.

  • nyse

    I totally apologize man – I was not trying to come off like, “telling you how it is” by explaining something so fundamental.

    I now understand what you meant now by your comment, and actually got hit by this a bit recently myself and came to essentially the same conclusion – trading closer maturity options closer to, or in the money, that way I can ride the vol (assuming long put) as well as the gamma as delta ramps up.

  • vision_invisible

    Definitely. I think this strategy is going to be huge and am hoping the VXX rises enormously in the next week or two. I actually feel more confident selling Sept rather than Dec.

  • amokta

    http://www.bp.com/liveassets/bp_internet/global
    interesting – is that mud coming out of the riser?

    p.s. we havent broken feb lows on secondary indices (iwm) – do they lag or lead?

  • http://evilspeculator.com molecool

    I actually added right at the top – got lucky…

  • yudhisthira

    Mole, I think your comments on zero png were very helpful today.
    I like to see how you think real time. Believe me, very helpful.

    While waiting for that beautiful end of day ramp up for another great setup,
    the break of vwap was indeed noteworthy and worthy of going with the flow at that moment.

    The fourth wave scenario seemed to be dying.
    If this is a B wave of an ongoing upward correction, it was good short entry situation nonetheless.

    With zero flat, we have been schooled that anything can happen.
    Very profitable in after hours, which may evaporate by morning, but I like it so far.

  • http://evilspeculator.com molecool

    If it becomes embedded we could be looking at some fun times.

  • http://evilspeculator.com molecool

    You are welcome – was way overdue.

  • http://evilspeculator.com molecool

    With all due respect, spud – I never pay the ask – usually get the mark. But this was not about me paying the ask, this was about the widening of the spread.

    I have been in this game for a few years, kid πŸ˜‰

  • http://evilspeculator.com molecool

    “Never ever ever ever use market orders with options.”

    Word – did that by accident way back and got killed. Barely got out alive.

  • katzo7

    Roubini is on Bill Mayer right now.

  • http://evilspeculator.com molecool

    Which is why I made that comment regarding the Spiders. They used to be pretty liquid – not sure if that has changed in the past year or so. Although I did get a pretty good fill when I added a few more puts today.

  • n2thezonez

    SPY options are very liquid, probably the most liquid of any stock or etf. I don't have a large account, so I don't enter huge orders, but it would be the most liquid (stock/etf) regardless.

    Jon Najarian always talks about unusual option activity where, say 20,000 options at a particular strike on XLF, BBY, MGM, ETC were purchased against an open interest of 2500. So I assume that even with those, market makers provide the liquidity to put a trade on. Now, are they there with the liquidity to take it off? That may be another question.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    see my lattest reply to mole (scenario where 1095 must hold and then very strong drop 100+)

  • http://evilspeculator.com molecool

    If you want to trade SPX options, you’re limited to one exchange, the CBOE. In contrast, SPY options are licensed for trading on all six options exchanges.

    # faster fills – computers are faster than humans.
    # Competitive volume options
    # better risk management due to smaller strikes

    The tax argument is another story though and I'm not the right person to answer that.

  • http://evilspeculator.com molecool

    You mean below, right?

  • katzo7
  • gatopeich

    Yeah, I'm watching EUR too. Already below Monday's low, if it decides to break year's low at ~1.214… Let's just say it is a bit risky to be long right now.
    I have a feeling that we are heading for new lows. Better keep fatfingered guys away from trading desks ;-).

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    hi boss, just saw your post, but no mention of the count I asked about but no details about the count I mentioned (this being a iv limited to 1095)

    best regards

  • http://evilspeculator.com molecool

    Show me a chart brother…

  • amokta

    i thought options were like stocks, so to avoid being stuck in 'pending' orders cue if price moved, i was putting limit one penny above ask (to buy) and one penny below bid (to buy). you learn something new every day by being on Evil speculator – i will now place limits around mid-spread,with skew up/down depending on if buying or selling (to close)

  • n2thezonez

    If you are selling to close a position and the market is moving fast, definitely check to see if it gets filled. I've definitely tried to sell before at a limit slightly below the bid, but the market was moving to fast.

  • amokta

    thanks!

  • Kudos

    I think the trendline on this mornings zero light was the most important thing there for me. I gave up on the rally and sold half my long hedge. Some of the comments can be confusing since it is very difficult for you to write which type of trader you are addressing. I.E. intraday, swing trader, long term. Later I sold the rest after I saw the momentum line up with the last hour of trading and a cratering eurjpy. I really like the comments, but to many can be confusing. Today I was extremely confused as it was and luckily my gut pointed me in the right direction as I remembered to think long-term. The vix going to 24 wasted alot of bullish momentum IMO, whether some services erase it or not.

  • http://iberianviews.blogspot.com/ catracho

    Looks a bit bearish I think that a lot of shorts have been scared out..plus the usual dip buyers are in..seems TOO easy..another scar down day ahead..THEN maybe a chance to play the long side ..AUDUSD seems to lead..so far

  • BobbyLow

    Double Ditto that.

    OK time for a war story involving that asshole.

    Back a few years ago I was day trading and doing pretty well. I had a bad habit of having CNBC on in the background.

    Anyhow that day, I had put on 2 stock trades (I forgot the names of those) and I was thinking about a third one which was Nortel (NT).

    So Cramer comes on the tube and starts banging the table on Nortel. So I said shit, I only want to hold on to this for maybe an hour or two. So I bought 400 Shares at $32 looking to get a quick .50 and get out.

    I then remembered that I had leave for a while so I closed out the first two trades for a small net gain. NT was up about 10 cents so I left the trade open. This was at 2 PM.

    I returned at 3PM to find out that NT had suspended trading pending an announcement.

    It finally reopened in A/H and the shit hit the fan as yet another accounting scandal hit the stock. It traded down as much as $8. I was able to get out in A/H in about 3 or 4 lots with a net loss of $5.00 per share so that trade cost me $2,000.

    What really pissed me off was that there was a MILLION Share Block trade that went off just before trading was suspended. A real fair game eh? There was an investigation into that trade but of course nothing ever came of it.

    I knew before that trade that Cramer was full of shit but I only needed the trade for a couple of hours. BTW, that was the first and last time I ever took a trade on his recommendation.

    Then I watched him pump GOOG at $600 and advise selling FSLR at $60 to see it go to $140.

    No sir I am totally convinced that I am a better stock picker than Cramer and so are my two Cats – Sylvester and Midnight.

  • Long_John_Silver

    Wouldn't you use options to play short ETF's? How would one short the S&P with options otherwise?

    (PS I'm not a futures trader)

    (PPS Noob query #426 .. )

  • OldChicago

    BIDU has been trading in the direction of the general market, but more bullish. Today's action is counter market direction. That was interesting to see.

  • anoopsan

    Thank you Tronacate

  • Long_John_Silver

    You make a persuasive case – perhaps it's time to repeat that long term game plan for those of us who've just arrived. Or perhaps you could link us to that post – I'd like to see it in detail.

    besides … I'd love to stop watching the tape for a while.. That Zero Lite can be habit forming …

  • Long_John_Silver

    That happened to me during the flash crash and I lost thousands chasing the declining bid, trying to close a few calls. Still made money but it was the ultimate slash and burn situation …

    I always make limit orders, split the bid and ask, then shade it towards the seller if I'm buying, incrementally until I get execution –

  • Long_John_Silver

    Futures are green tonight however – FWIW

  • Long_John_Silver

    Futures are green tonight however – FWIW

  • Long_John_Silver

    Yes, that was *absolutely invaluable* given the expectations coming into the trading day – congratulations Mole

  • spudthorpe

    Mole, I know you already know this. My comment was for the benefit of your readers who may not have much experience trading index options.

  • spudthorpe

    Rayden, I use different strikes and expiration dates depending on whether I'm after delta or vega. Lately I've been using two or three month expiries, roughly at the money, so that both delta and vega are reasonably high. If I want to hold a position for a long time I would usually take a deep-in-the-money six to twelve month option to minimize theta but retain a reasonable delta. It still takes less cash than a straight short, and if you roll the options while they still have quite a few months on them, you really don't lose much to time decay.

    I try to find strikes and expiries that have some reasonable daily volume. You can often find peculiar (i.e. distant expiry, way off-the-money) options with zero trading volume. I've found it's harder to get a good price on those. I always assumed the reason you can split the spread so easily on liquid options is that other traders are doing the same thing. I have frequently had the experience of cranking up my limit order one tick at a time on less-liquid options until I suddenly get a fill; I imagine it's just that some market maker figured it was worth making $0.20 by filling the order.

  • spudthorpe

    I find SPY options are incredibly liquid and almost always have a tight spread (often a penny on popular strikes/expiries). I don't trade them much because of the tax treatment, and because they incur higher commissions per dollar of principal due to their smaller size. But if you want liquidity and tight spreads, you really can't beat them.

  • spudthorpe

    I've been filing my taxes this way for years and have run it by a number of lawyers and accountants. The relevant tax code is U.S.C. Title 26 section 1256. Essentially, futures contracts and non-equity options (except hedging transactions) have to be marked to market at the end of the year for tax purposes, and all gains and losses are treated as 60% LT/40% ST regardless of holding period. For holding periods less than a year, this is a truly vast advantage for index options over ETF options.

  • spudthorpe

    I've been filing my taxes this way for years and have run it by a number of lawyers and accountants. The relevant tax code is U.S.C. Title 26 section 1256. Essentially, futures contracts and non-equity options (except hedging transactions) have to be marked to market at the end of the year for tax purposes, and all gains and losses are treated as 60% LT/40% ST regardless of holding period. For holding periods less than a year, this is a truly vast advantage for index options over ETF options.

  • amokta

    how come such huge jump in US futures overnight – asian markets up but nothing massive

  • spudthorpe

    From now on, I'll start all my comments with “Mole, I know you already know this, but…” πŸ˜‰

  • Rayden

    Hey, no prob. And yeah, that seems to be the solution… don't like it because those options time decay so much faster, but at least they have a whole lot more gamma. I'll probably keep a small position of my SPX Dec 2011 400 puts I bought for 2 bucks, but I think I'd like to play something that can at least double in every minor wave (if I call it correctly of course).

    Btw, here's something to play with: front month buy 1000P sell 900P, second month sell 1000P buy 950P. In a huge drop, max payoff is close to 50, in an up move with decreasing volatility it should be more or less flat. I'm trying a small position like this bought right around the vix peak (ES 1065, VIX 45) to see how it behaves, so far it is slightly less than flat, but I think if we get to the 1105-1122 area I will be able to unwind it at breakeven. Of course, I could just buy back the sold options only, and end up with some 1000P and 950Ps. Thoughts?

  • Rayden

    one more nice tax tidbit, gains and losses from section 1256 can be carried forward *OR BACK* by up to 3 years, at your option, including after the fact… as i found out with my losses from 2009 which i carried back to net against some of my gains from 2008, lol.

  • ricebowl

    Going long on (buying) SPY puts shorts the S&P. Shorting (selling) SPY calls also shorts the S&P. There are also options available on SPX itself, but the spreads are much wider than SPY options.

    Although I would not recommend it, you can also buy puts or sell calls on UPRO or sell puts/buy calls on SPXU. The spreads on UPRO and SPXU options are pretty ugly — too much risk for too little reward. I occasionally play FAS/FAZ options, but I have never played UPRO/SPXU.