Time For Some Insurance

Let me precede this post with a few caveats, just so that we are clear. First up, I’m not really bearish here. As a matter of fact the Zero signal suggests that we’ll see more upside today and we could easily blast higher way above the ES 2000 mark. Second, what I am proposing here is nothing but downside insurance – meaning we are not attempting to nail a top and make fortunes riding the tape to the downside. Third, I don’t really like bear markets. Back in the days, before the 2008 crash, I actually thought I did. And nothing pleased me more than watching equities being taken to the woodshed while the Fed was laboring in the basement pulling various levers and patching leaking valves to keep the whole system from blowing up. Yes, I would very much like to see some sense of accountably and trust return to Wall Street – if there was ever any present in the first place. But in my time I have come to realize that this will most likely never happen, just like world peace, or feeding the hungry, or me dating Uma Thurman.

Bear markets are very tough to trade actually and in the past I have written about this subject on numerous occasion. Give me a wild bull market anytime – including medium term corrections. Although significant riches can be made riding the bear most are not capable of doing it and the shake out rate is very high. According to Dunner-Kruger you probably think you are the exception, but most likely you are not and will wind up being caught in the wild swings that precede the big sell offs.

Finally, I absolutely and completely expect to lose the entire premium of all my long puts. As a matter of fact nothing would please me more than to be wrong here and that we’re looking at another spring/summer season of bullish tape. So whatever you do – don’t assume that the Mole has turned bearish.

That said – given what I have presented via my momo and breadth analysis I think it would be wise to start accumulating downside insurance. Doing that may become even cheaper in the coming weeks but for me the threshold has been reached and thus I decided to take action.

Just so you know that I’m not kidding, by the way. The Zero indicator is currently flagging a +2.0 signal and that usually means more upside is in the works. For me timing whatever top may be in the works is negligible however.

The ES futures have advanced to the 100-day SMA and if it closes above it today then it’s quite possible we’re going to see this advance extend much higher. Also recall that we are now trading above the 25-week and 100-week SMA, as well as the 25-month SMA. THAT IS VERY BULLISH!!

The VIX has now descended to my diagonal support line near the 17 mark. That’s exactly where I wanted it. Yes, of course we may see it drop to 16 or 15 or even lower.

My trend strength indicator will most likely close at the 2 mark and that in combination with lowered volatility was my requirement for pulling the trigger on a few SPY puts.

How far you are willing to go out horizontally and vertically is up to you of course. I think at minimum April puts are necessary as theta burn really starts to kick in below 30 days. Clearly the July contract is a lot more expensive so perhaps a mixture between the two would be a good compromise. Remember that volatility plays a big part in option pricing, so IF the proverbial excrement hits the jet engine then a VIX above 30% or 40% is quite possible. The pricing of premiums would of course increase accordingly (see bottom left corner).

Words To The Unwise

Please don’t back up the truck. Just this morning I saw someone post ‘100% short’ in the comment section. I don’t really know what that means but I truly hope that he/she didn’t just put the entire account into a delta negative position. The puts I bought earlier are already losing money and that’s just fine by me. Once again – I would be glad to be wrong and seeing my premiums evaporate as I make a lot more money trading a bull market with a supportive Fed paving the way. Personally I think they are out of rope at this point – but I’ve been wrong thinking that many years ago. And these days I just follow the direction the tape offers me.

To Summarize

• Don’t over think this.
• Buy some downside insurance.
• Expect to lose the entire premium.
• Pick a nice mixture of strikes and expiration if you can.
• I don’t recommend going below 180 on the Spiders – you don’t want to be too far out either and even 180 is already pretty far OTM.
• Hope that you’re wrong and that we get another year of the bull. Drama and systemic risk isn’t fun. Neither is unemployment and families roaming the streets homeless.