Do You Feel Lucky Punk?

It’s Friday evening and I decided to go all Dirty Harry on your asses. The center of my post are two simple charts that I saved for the weekend – just in case you were feeling that sudden urge to make any big bets up here.

Exhibit A – our beloved volume profile chart – the gift that keeps on giving. I post this one regularly and I’m sure you’re all familiar with it. What’s salient about it right now is the fact we pushed right up to our current volume abyss, which thus far has been proven to be impenetrable.

Since Tuesday no real attempt to breach it has been made – every time we get close we seem to be running out of fuel. Which confirms that despite all the alleged risk appetite out there nobody is eager to take this thing much higher here – at least not right now. My take is that some after-hours or weekend event would be needed – some f… you candle that gaps the majority of traders and bridges the gaping volume hole looming above. Always a possibility but then there’s this:

Exhibit B is a long term view of the VIX. Since the 2007/2008 debacle we have a well established support line which over the years has been slowly dropping from about 17 to into 15 right now. Depending on how you draw it you can add another handle and thus 14 is your uncle.

Now considering these two charts the big questions you need to ask yourself right now is this: Is it really wise to be delta positive right now and right here? Even if we spike higher next week on heaven knows what after hours news event – is being long here worth the downside risk? Granted currently there are no technical hurdles on the horizon that would preclude us from reaching VIX 14 or even 13. But you have to ask yourself: What are the odds? Do you feel lucky, punk? Well, do ya?

Actually – I do. With a VIX this low I am starting to think about some delta negative strategies. The only problem is that I wish I had more technical reasons to be short here – and that’s the one big fly in our ointment. So we have to make a choice – either give this one a miss or use a strategy that will not cost us much if we wind up being wrong. Which by the way could easily happen – I am not going to sugar coat this and I have made it pretty clear recently that we are in technical limbo here. Even our inside day setup from Wednesday has been shot to hell at this point.

Given this the one medium term strategy that makes sense is to dip into some cheap lottery tickets – a.k.a. far OTM puts either front month or the next. Since August only has 7 days left I would go with September puts. If we push higher from here then you will lose premium but at least you won’t be vega squeezed and that should contain the damage. But if we drop from here and premium shoots up then we’ll bank some mighty coin. So a few lottery tickets it is – at least for this market megalomaniac.

Support Zones

In order to pick those lottery tickets we need to consider what our prospective support zones are. That’s basic reversal play 101:

On the daily we have the 100-day SMA at 1355, the 25-day Bollinger at 1320 and the 100-day Bollinger at 1290.

On the weekly we have a NLSL at 1340 and on the monthly a NLSL at 1320. So it seems 1355 to 1340 is our first range and 1320 is a strong contender for a little wipeout target.

Based on that I picked two lottery tickets – the September 135P and 132P on the Spiders. As you can see the profit potential is rather nice but it’s a rapid increase in vega that would result in an explosion of our premium. As a matter of fact – we could stay right here where we are and an increase in vega would bank us some coin.

As I said above – technically there is not much on the horizon that suggests a reversal here. But with a VIX near a historical support line it does not make sense to be long here – simplemente no vale la pena. The play I suggest makes sense but it’s a long shot and I call them lottery tickets for a reason. So if you decide to grab some of them then I suggest you only use a tiny percentage of your portfolio. You don’t want to lose any sleep over taking on speculative positions – if you do reduce exposure until normal sleep pattern resumes.

Enjoy your weekend.

Cheers,