VIX Opening Gaps

I noticed something on the VIX this morning which inspired me to dig a bit deeper. It started with the realization that the VIX has experienced a marked increase in realized volatility (yes RV in IV) over the course of this year, whilst at the same time managing to drop to new all time lows of 8.84. Wall of worry indeed, especially given that the E-Mini is already pushing into new virgin territory as I am typing this.

What really caught my attention however was the huge opening gap down that proceeded it a few months earlier, which one may call the ‘point of recognition’ if you will. Although followed by two more touches of the upper Bollinger the series of lower highs and lower lows eventually lead to our new all time low.

It’s the opening gaps however that are of particular interest to me, and in particular the significant ones which easily jump out, even on a multi-year panel. More specifically what I find intriguing is the aftermath of the opening gaps, which at first glance (and without in depth data analysis) appears to be completion to near the Bollinger band in the direction of the gap. In more simple terms: it seems to me that a [significant – still to be defined] opening gap to the upside is followed by push toward the upper BB. On the inverse a opening gap to the downside appears to be followed by a visit of the lower BB, although in more recent times (and courtesy of a decade of QE) those moves are more curtailed and I would probably exit any short VIX campaigns a few days later.

Clearly we don’t often get downside gaps and the real fun seems to be in the direction of where the VIX is skewed – the upside. Typing I just noticed that I missed two consecutive gaps in mid 2008 which apparently canceled each other out. It was a crazy year after all and if you look carefully you can see that big spike up in August when Evil Speculator appeared on the scene 

If a gap is immediately followed through by a large candle (e.g. center green) then it’s probably worthwhile to cash out your chips. Also, a fast drop lower followed by gap higher may just be the hallmarks of a temporary counter rally.

Quite a few gaps higher after the dot.com bubble had burst. I was just getting rid of my training wheels back in those days but do remember the swings very well.

The golden rule however is to get out after a touch of the upper Bollinger. On the chart above we do have several events after which holding long would have paid off handsomely but remember that this was before the Fed unleashed quantitative easing on the world and the financial markets would never be the same again. Neither would be the concept of moral hazard but I digress…

As mentioned in my intro, the E-Mini is on a rampage this morning and after breaching its daily NLBL yesterday it’s now making a run for not just one but two consecutive weekly NLBLs, the second standing at 2488.5. A close above those two is a very strong buy signal and pretty much seals the bear’s dreams of having any fun this September.

The Dollar is bouncing back a little and that pretty much sealed the fate on my silver campaign. I really hope you were able to participate in this one as you ought to have banked at least 2.5R in this one. Another reason perhaps to finally sign up as a member?

Speaking of which… we have entry candidates this morning:

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Week #36 Top/Bottom Stock Returns

Before I run – earlier this morning (yes, I’m a busybody) I coded myself a routine that grabs last week’s top/bottom stock symbols and then calculates the returns. So what would have happened to last week’s candidates at the 9/10 market close?

Long Profits: DVN=-1.99, COO=6.48

Long Profits Total: 4.49

Short Profits: BAC=4.98, GE=5.25, CSCO=2.54, INTC=-0.28, MSFT=-0.05, C=3.51, PFE=-0.41, JPM=3.58, DIS=4.36, VZ=3.78

Short Profits Total: 27.26

Combined Profits Total: 31.75

In case you wonder that’s on a relative percentage basis, thus it does not represent R intervals. Clearly one would spread one or two R maximum across the entire mini-portfolio, which is then held for one week. Weekly options may be another way of playing this. Although week #36 did not produce many long candidates I would usually try to split half my exposure across the longs and the other across the longs. Assuming 20 stocks (ten long and ten short) that would be 0.05R per symbol if exposing a total of 1R in risk.