from the desk of Dr. Terry F Allen

Skip navigation

Member Login  |  Contact Us  |  Sign Up

1-800-803-4595

Posts Tagged ‘Bearish Options Strategies’

Another Buying Straddles Story

Monday, July 16th, 2012

For most of the last year, the market (SPY) and many individual stocks have fluctuated more than the implied volatility of the options would predict.  This situation has made it quite difficult to make gains with the calendar spread strategy that we have long advocated.

Now we are experimenting with buying straddles as an alternative to our basic strategy.  This represents a total reversal from hoping for a flat market to betting on a fluctuating one.

Today I would like to report on a straddle purchase I made last week.

Another Buying Straddles Story

I selected the Russell 2000 (Small-Cap) Index (IWM) as the underlying. For many years, this equity seems to fluctuate in the same direction and by about the same amount as the market in general (SPY) although it is trading for far less ($80 vs. $134) so the percentage fluctuations are greater.

On Monday morning, IWM was trading right about $80. I bought an 80 straddle using IWM (Jul2-12 puts and calls), paying $1.53 for the pair.  If IWM moved by $1.53 in either direction, the intrinsic value of either the puts or calls would be $1.53, and there would be some time premium remaining so that either the puts or calls could be sold for a profit.

How likely was IWM to move by more than $1.53 in either direction in only one week?  Looking back at weekly price behavior for IWM, I found that in 62 of the past 66 weeks, IWM had fluctuated at least $1.60 during the week in one direction or another.  That is the key number I needed to make the purchase.  That meant that if the historical pattern repeated itself, I could count on making a profit in 94% of the weeks.  I would be quite happy with anything near that result.

Buying a straddle fits my temperament because I was not choosing which way the market might be headed (something I know from experience that I can’t do very well, at least in the short term), and I knew that I could not lose 100% of my investment (even on Friday and the stock had not moved, there would still be some time premium remaining in the options that could be sold for something).

One on the biggest problems with trading straddles is the decision on when to sell one or both sides of the trade.  We’ll discuss some of the choices next week.  What I did was place a limit order to take a reasonable profit if it came along.  When IWM had fallen about $1.75, I sold my puts for $1.85 on Thursday.  On Friday the stock reversed itself, and I was able to collect $.17 by selling the calls, making a total 20% after commissions for the week. Not a bad result, I figured.  

At some point during the week, there were opportunities to sell both the puts and calls for more than I sold them for, but I was delighted with taking a reasonable profit.  You can’t look back when trading straddles.  If I had not sold the calls but waited until the end of the week, I would have lost about 70% of my original purchase.  So selling when you have a small profit is clearly the way to go.

Last Week’s Trade – Buying Straddles With Weekly Options

Monday, July 9th, 2012

Last Friday was the government’s monthly jobs report.  Historically, the market has been unusually volatile on those Fridays when the actual numbers either exceed expectations or are disappointing.  Last week we gave the results of a strangle trade we made a year ago which resulted in a gain of 67% for the day.

Last Thursday we made a similar bet, this time using a straddle.  Here is how it worked out for us.

Last Week’s Trade – Buying Straddles With Weekly Options

Near the close on Friday, the stock (SPY) was trading right around $137 and it was possible to buy both a Jul2-12 137 put and a 137 call which would expire one day later for $1.18 ($118 per spread plus $2.50 commissions).  We bought 7 spreads, paying $843.50 including commissions.  

This is called buying a straddle.  If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could sell those options at a profit.  (At any price above $138, the calls could be sold for more than we paid for the straddle, and at any price below $136, the puts could be sold for more than we paid for the straddle.)

The market expected that 100,000 new jobs would be created, but the actual results were lower – about 80,000.  When the market opened up just over a dollar lower, it seemed not to be going anywhere so we took a profit, selling the puts for $155 each, collecting $1076.25 after commissions (the calls expired worthless and no commission was involved).  Our net gain on the trade was $235, or 27.8% on the initial investment.

We were hoping that the stock would reverse itself after the early drop so that we could sell the calls later in the day and add to our gain, but that never happened.

If we had waited until later in the day the profit could have been more than double this amount but if we had waited until the end of the day it would have been less.  There is no easy answer as to when to sell a straddle, but we will probably continue our strategy of taking a moderate profit when it comes along.  Another way to play it would have been to sell enough of the spreads to break even and let the others ride in hopes of a windfall gain.

Straddle buyers like volatility as much as we don’t like it in our other portfolios.  What they like best is a whip-saw market where the market moves sharply higher (and they sell their calls) and then down (when they unload their puts).   There are many ways to profit with options. Buying straddles when option prices are low and volatility is high is one very good way to make extraordinary gains.

The downside to buying straddles is that if the market doesn’t fluctuate much, you could lose every penny of your investment.  This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips.  

However, straddle-buying can be quite profitable if the current market patterns persist.  Right now, VIX (the so-called “fear index” that measures how high option prices are for SPY options) is at 17.10 compared to its mean average of 20.54.  This means that option prices are relatively low right now.  Last December, for example, when VIX was about 25, the same straddle we bought last week for $118 would have cost over $200.

On Friday, a SPY 137 at-the-money straddle with one week of remaining life (expiring July 13, 2012) could have been bought for $1.99 ($199 each).  If at any time during the next week, if SPY fluctuated more than $2, the straddle should be trading for more than $2.  Over the past 13 weeks, SPY has moved in one direction or another by at least $2 in 11 of those weeks, and in one week it fell by $1.94 at one point.

Straddle buyers like volatility as much as we don’t like it in our other portfolios.   There are many ways to profit with options. It is best to remain flexible, and use the option strategy that best matches current market conditions. Buying straddles or strangles when option prices are low and volatility is high is one very good way to make extraordinary gains, as we happily did last week.

The downside to buying straddles or strangles is that if the market doesn’t fluctuate much, you could lose every penny of your investment (although if you don’t wait too much longer than mid-day on the day options expire, even out-of-the-money options retain some value and should be able to be sold for something).  This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips.  However, straddle- or strangle-buying can be quite profitable if the current market patterns persist.

If the market knocks you down, try laughing instead of crying

Monday, June 18th, 2012

This week I would like to share some humorous market definitions.

In case you missed it last week, we are keeping open our offer of the 2012 ebook version of Making 36% for only $2.99. This is your chance to learn everything you need to know about options (ok, maybe almost everything) for a lower price than ever before.  Order here and use the code [this code is no longer valid].  The order form will say that you will receive the 2011 paperback edition but if you use the [this code is no longer valid] code, you will receive the 2012 ebook instead. (The revised 2012 paperback edition will be available next week if you would prefer to wait and get the hard copy at the regular price).

Even if you have purchased an earlier edition of my book, you might want to see the new version.  Two new important strategies are spelled out for the first time – the 10K STUDD (Short Term Ultra Double Diagonal) and the Calendar Twist (a new approach to placing calendar spreads).  Either strategy might change everything you ever thought about trading options.

If the market knocks you down, try laughing instead of crying–

Some Market Definitions:

CEO –Chief Embezzlement Officer.

CFO– Corporate Fraud Officer.

BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.

VALUE INVESTING — The art of buying low and selling lower.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

STANDARD & POOR — Your life in a nutshell.

STOCK ANALYST — Idiot who just downgraded your stock.

STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

MARKET CORRECTION — The day after you buy stocks.

OUT OF THE MONEY –   When your checking account’s overdraft hits bottom.
CASH FLOW– The movement your money makes as it disappears down the toilet.

YAHOO — What you yell after selling it to some poor sucker for $240 per share.

WINDOWS — What you jump out of when you’re the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nuthouse.

PROFIT — An archaic word no longer in use.

How to Make a Portfolio of Calendar Spreads Either Bearish or Bullish

Monday, June 11th, 2012

I am pleased to offer the 2012 ebook version of Making 36% for only $2.99. This is your chance to learn everything you need to know about options (ok, maybe almost everything) for a lower price than ever before.  Order here and use the code [this code is no longer valid].  The order form will say that you will receive the 2011 paperback edition but if you use the [this code is no longer valid] code, you will receive the 2012 ebook instead. (The revised 2012 paperback edition will be available in about two weeks if you would prefer to wait and get the hard copy at the regular price).

Even if you have purchased an earlier edition of my book, you might want to see the new version.  Two new important strategies are spelled out for the first time – the 10K STUDD (Short Term Ultra Double Diagonal) and the Calendar Twist (a new approach to placing calendar spreads).  Either strategy might change everything you ever thought about trading options.

How to Make a Portfolio of Calendar Spreads Either Bearish or Bullish:

At Terry’s Tips, we use an options strategy that consists of owning calendar (or diagonal) spreads at many different strike prices, both above and below the stock price.  Six of the eight actual portfolios we carry out use SPY as the underlying so we are betting on the market as a whole rather than any individual stock.

We typically start out each week or month with a slightly bullish posture since the market has historically moved higher more times than it has fallen.  In option terms, this is called being positive net delta.  Starting in May and extending through August, we usually start out with a slightly bearish posture (negative net delta) in deference to the “sell in May” adage.

Any calendar spread makes its maximum gain if the stock ends up on expiration day exactly at the strike price of the calendar spread.  As the market moves either up or down, adding new spreads at different strikes is essentially placing a new bet at the new strike price.  In other words, you hope the market will move toward that strike.

If the market moves higher, we add new calendar spreads at a strike which is higher than the stock price (and vice versa if the market moves lower).  New spreads at strikes higher than the stock price are bullish bets and new spreads at strikes below the stock price are bearish bets.

If the market moves higher when we are positive net delta, we should make gains because of our positive delta condition (in addition to decay gains that should take place regardless of what the market does).  If the market moves lower when we are positive net delta, we would lose portfolio value because of the bullish delta condition, but some or all of these losses would be offset by the daily gains we enjoy from theta (the net daily decay of all the options).

Another variable affects calendar spread portfolio values.  Option prices (VIX) may rise or fall in general.  VIX typically falls with a rising market and moves higher when the market tanks.  While not as important as the net delta value, lower VIX levels tend to depress calendar spread portfolio values (and rising VIX levels tend to improve calendar spread portfolio values).

Once again, trading options is more complicated than trading stock, but can be considerably more interesting, challenging, and ultimately profitable than the simple purchase of stock or mutual funds.

Andy’s Market Report 5/6/12

Sunday, May 6th, 2012

Bears rejoice.

The market experienced its worst week of 2012 on the back of a worse than anticipated unemployment report.

The S&P 500 fell 1.6% to 1,369.10, extending its weekly drop to 2.4%. The Dow slumped 168.32 or 1.3%, to 13,038.27 Friday.

Employers added 115,000 jobs in April, the Labor Department stated on Friday. It was the third straight month in which hiring had slowed, intensifying fears the U.S. recovery is truly losing momentum.

In addition, even a slight drop in the unemployment rate to 8.1% had a dark tone because the fall was due entirely to people dropping out of the workforce.

“The bottom line is you don’t have evidence that this economy has reached escape velocity,” said Robert Tipp, an investment strategist at Prudential Fixed Income.

Analysts had expected 170,000 new jobs in April, and the shortfall could open the door a bit wider for the Federal Reserve to step up efforts to help the economy with another round of quantitative easing.
The employment report included another ominous numbers. The participation rate, a measure of how many Americans are looking for work, fell to a 30-year low at 63.6% of the population.

But kicking the can down the road once again isn’t the ultimate answer. The economy is not growing as fast as needed and with continued woes in Europe there could be another rough road ahead. This of course is just speculation, but when stripped down to its core the economy does not look promising over the coming months.

Technical Mumbo Jumbo

The S&P pushed through 1370 and is now on track to hit 1350. If the major market index is able to push through that level I would expect to see a test of the 1290 area. However, I do expect to see a short-term bounce over the near-term only because of the oversold nature of the market. But, once that kicks back into a neutral state which might only take half a trading day, I expect the selling to start back up.

Remember, sell in May is upon us and I expect to see the historical norms to once again play out this year. One of the perks is that volatility as see by the VIX, VXX and VXN should increase which should afford some great opportunities to sell premium.

The economic calendar is light next week, but elections in Europe should stir the market pot during the early part of the week. One thing is certain next week should be very interesting…possibly the most interesting week of the year.

Stay tuned!

Using Puts vs. Calls for Calendar Spreads

Monday, April 16th, 2012

Over the last two weeks, the market (SPY) has fallen about 3%, the first two down weeks of 2012.  At Terry’s Tips, we carry out a bearish portfolio called 10K Bear which subscribers mirror if they want some protection against these kinds of weeks.  They were rewarded this time, as usual, when the market turned south.  They gained 45% on their money while SPY fell 3%.

10K Bear is down slightly for all of 2012 because up until the last two weeks, the market has been quite strong.  If someone invested in all eight of our portfolios, however, their net gain so far in 2012 would be greater than 50%.  How many investments out there do you suppose are doing that well?

10K Bear predominantly uses calendar spreads (puts) at strike prices which are lower than the current price of the stock.  Today I would like to discuss a little about the choice of using puts or calls for calendar spreads.

Using Puts vs. Calls for Calendar Spreads

It is important to understand that the risk profile of a calendar spread is identical regardless of whether puts or calls are used. The strike price (rather than the choice of puts or calls) determines whether a spread is bearish or bullish.  A calendar spread at a strike price below the stock price is a bearish because the maximum gain is made if the stock falls exactly to the strike price, and a calendar spread at a strike price above the stock price is bullish.

When people are generally optimistic about the market, call calendar spreads tend to cost more than put calendar spreads.  For most of 2012, in spite of a consistently rising market, option buyers have been particularly pessimistic.  They have traded many more puts than calls, and put calendar prices have been more expensive.

Right now, at-the-money put calendar spreads cost more than at-the-money call calendar spreads.  As long as the underlying pessimism continues, they extra cost of the put spreads might be worth the money because when the about-to-expire short options are bought back and rolled over to the next short-term time period, a larger premium can be collected on that sale.  This assumes, of course, that the current pessimism will continue into the future.

If you have a portfolio of exclusively calendar spreads (you don’t anticipate moving to diagonal spreads), it is best to use puts at strikes below the stock price and calls for spreads at strikes which are higher than the stock price.  If you do the reverse, you will own a bunch of well in-the-money short options, and rolling them over to the next week or month is expensive (in-the-money bid-asked spreads are greater than out-of-the-money bid asked spreads so you can collect more cash when rolling over out-of-the-money short options).

The choice of using puts or calls for a calendar spread is most relevant when considering at-the-money spreads.  When buying at-the-money calendar spreads, the least expensive choice (puts or calls) should usually be made. An exception to this rule comes when one of the quarterly SPY dividends is about to come due.  On the day the dividend is payable (always on expiration Friday), the stock is expected to fall by the amount of the dividend (usually about $.60).  Since the market anticipates this drop in the stock (and knowing the specific day that the stock will fall), put prices are generally bid higher in the weeks before that dividend date.

This bottom line is that put calendar spreads are preferable to call calendar spreads for at-the-money strikes (or even at strikes slightly higher than the stock price) coming into a SPY dividend date. Even though the put spreads cost more, the Weekly options that can be sold for enough extra to cover the higher cost.  You do not want to own SPY call calendar spreads which might become in the money on the third Friday of March, June, September, or December because you will have to buy them back on Thursday to avoid paying the dividend, and you may not want to make that purchase to keep your entire portfolio balanced.

Andy’s Market Report 3/18/12

Sunday, March 18th, 2012

The March options expiration cycle ended without much fanfare, but not after reaping a respectable 2% gain. All of the major indices saw gains exceed 2% with the small-call Russell 2000 being the exception. The market has now pushed higher nine out of the last ten weeks. The Nasdaq and S&P 500 have led the way all year and are now higher on the year 17.3% and 11.7%, respectively. Both have also pushed above key levels. The Nasdaq sits above 3000 and the S&P is now above pre financial crisis levels trading over 1400.

There is no doubt that this rally has been one for the ages. For instance, last week marked the first time the S&P closed below its 20-day moving average. The streak: 52 days. It was the second longest streak of all time. The last time such a streak occurred – 1944!

Moreover, last week broke the 1% daily decline and ended the 10th longest such streak. If that wasn’t enough, last week also saw the first “90% down day” this year. Another historical streak. We can all thank the slow and steady rise in the market for the historical accomplishments.

“We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven’t been this bullish for a long time,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas.

But, where are we now? How will the market fare over the next few months? Are there any historical precedents that we should be aware of going forward?

Well, I am not a prophet. I can’t predict the future. But, I can tell you how the next few weeks fare on a historical basis. Hopefully this will give you a “heads up” as to what to anticipate going forward.

The day after expiration is typically bearish. March is no different; in fact, the week after expiration has seen the Dow down 15 of the last 24 years. But weakness continues throughout the rest of the month. The end of March is actually one of the weaker periods for the stock market.

Will it happen again this year? No one knows for certain, but with Apple making up roughly 18% of the Nasdaq 100, when the tech behemoth’s parabolic move comes to an end we should see a sharp decline in not only the Nasdaq, but the S&P as well. Remember, since the latest rally began Apple has managed to tack on approximately 54%. Yes, 54%. I am very curious how the largest company in the universe manages to be mispriced by several hundred billion dollars. Yet, Wall Street analysts keep pushing estimates higher.

My thought – we will be discussing this magnificent run five years from now when Apple is trading with a market cap far below $500 billion. Like its predecessors in the exclusive $500 billion club, it is my opinion that Apple will eventually suffer the same fate.

But don’t just listen to me, listen to what the market is saying.

While the investor’s fear gauge, VIX has been sliding to five year lows, the expected volatility in Apple has increased, judging by a VIX index that tracks Apple options. Apple, like IBM and other bellwether names, has its own VIX index.

The CBOE Apple VIX index , which measures the expected 30-day volatility of the underlying shares of Apple, jumped 35 percent this week, suggesting more gyrations ahead as more investors speculate on short-term moves.

The end of March should be very interesting. April is typically a strong month and then we enter the “sell in May” period. One thing is certain, 2012 should be one for the record books. I can’t wait to see how it plays out

Lessons Learned Around the Apple New Product Announcement

Monday, March 12th, 2012

Three weeks ago, we set up a special portfolio with a goal to make 100% on AAPL options in 4 weeks.  We closed out the positions last Friday, a week early.  We failed to reach our goal.  The portfolio started out with a value of $4488 and after 3 weeks, it was worth $7172.

The gain for the 3 weeks was 60% (after commissions).  Even though we failed in our initial goal, most of us were happy with making 60% in less than a month on our money.

For two years, Terry’s Tips has carried out at least one portfolio (and sometimes two) which use AAPL as the underlying, and we have noticed some patterns of stock price actions and option values that I would like to share with you today.

Lessons Learned Around the Apple New Product Announcement

AAPL has been a great underlying stock for Terry’s Tips subscribers.  In April, 2010 (just under two years ago), we set up an actual brokerage account to trade options on AAPL.  We started with $5000 in the account. 

We maintained a bullish position in this portfolio because we liked the prospects for this company.  Actually, it performed quite a bit better than we expected.  Over the two years, whenever the portfolio value grew to over $10,000, we withdrew cash from it so that new Terry’s Tips subscribers who wanted to mirror the portfolio in their own account (or have trades made for them through the Auto-trade program at thinkorswim) could get started with $10,000.

A total of $13,000 was withdrawn from the portfolio over two years, and the account today is still worth more than $10,000, or double what subscribers started with.  It works out to a gain of about 565% over the period.

We learned some things along the way.  First, in the few weeks leading up to an announcement of earnings or a new product release, the stock tended to move higher.  Once the announcement was made, the stock usually fell back a bit (market expectations seem to be greater than the reality). 

There is an old saw in the market – “buy on the rumor and sell on the news,” and it seemed to prevail after the Apple announcements most of the time.

Last week, we expected a similar pattern once the news about the new iPad was announced.  We added new spreads to our portfolio to provide downside protection in case the pattern continued (we bought new calendar spreads at strike prices well below the current price of the stock).  These spreads ultimately lost money when the stock did not fall this time around.  At one point shortly after the announcement, it did fall by almost $30 but quickly reversed itself.

In spite of this experience, we expect that in future AAPL announcements, such as the quarterly earnings announcement due near the end of April, we plan to add downside protection once again.

The second big pattern we noticed concerned the option prices around announcement time.  Leading up to the announcement, option prices soared.  The implied volatility of the March options got up to 40, and fell all the way to 25 after the announcement.  In the experimental portfolio we started with $4488, we had used Weekly Mar2-12 as the long side, and these prices collapsed after the announcement.  The portfolio lost money for the week.

In our other AAPL portfolio, the one we have been running for almost 2 years, our long positions were in further-out months, and these option prices did not collapse.  As a result, this portfolio gained 11% for the week (even though we had placed some downside protection spreads in it as well).

In future announcement periods, we intend to use longer-term call options as the long side to avoid the collapse of shorter-term option prices once the announcement has been made, even though those options are quite a bit more costly.

We have made 3 short videos which explain the 3-week results of the special shorter-term portfolio (which we have now closed down and replaced with a new set of AAPL options).  If you have not already seen these videos, you might check them out.

The original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

The portfolio was updated in the Week 2 video -
http://youtu.be/e0B7_6e_5AE 

And finally, adjustment trades we made were displayed in this little video –
http://youtu.be/YC3d2NuX2MI  Be sure to enlarge it to full-screen mode so you can see the numbers. 
_ _ _
Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips (including the two AAPL-based portfolios) and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself? 

I look forward to having you on board, and to prospering with you.

Terry

 

Andy’s Market Report – 1/31/12

Tuesday, January 31st, 2012

January’s rally was admirable. Its perseverance frustrated bears. The infrequent single day declines maxed out at -0.6%.

And the last nine days of the month were more than mind-numbing for most traders as the market traded in a very tight range.

There’s no doubt the bears are ready. Almost every technical and sentiment measure I follow has pushed into a bearish state. Typically, I am ecstatic by the weight of the bearish measures, but it seems everyone is aware of the measures and have joined my short-term bearish camp. And when the herd is anticipating something a bearish move might have a hard time coming to fruition.

That was certainly the case last month.
We must remember that January is one of the strongest month of the year for the market. February not so strong with a historical return of 0.0%.

February swoon? Not yet.

After Friday’s unemployment report, the bulls managed to push the indices, particularly the Dow to highs not seen since before the financial crisis in 2008. A drop in the unemployment rate to its lowest level in three years (8.3%) propelled stocks.

“In this economy only one variable matters right now and that variable is employment,” said Lawrence Creatura, an equity portfolio manager at Federated Investors.

“This report was great news. It was beyond all expectations, literally. The number was higher than even the highest forecast.”

After three months of gains a decline seems the likely scenario. Again, almost all technical and sentiment measures have reached short to intermediate-term extremes, but will they win out for the bears or will the mighty power of the bulls push through the consolidation that has lasted nine long trading days?

Talented analyst Jason Goepfert of Sentimentrader.com recently stated that when “the S&P 500 closed at a six-month high with volume 10% off its low from the past month (as it did on Thursday), then the next two days were positive only 12 out of 46 times.”

Out of the 12 positive occurrences, only twice did it advance more than 1%. Thirteen times it closed with a loss greater than 1%.

Another interesting stat provided by Mr. Goepfert is “the last 8 Fridays when the Nonfarm Payroll report was released” all have closed lower than the prior trading day.

In fact, if you went back to September 2009 and purchased shares of the S&P and sold at the close of the trading day you would have only made a paltry 1%.

Couple the aforementioned studies with short-term overbought readings in three out of the four major indices and I expect to see a short-term pullback over the next 1-5 days.

The two best performing days (on a historical basis) in February are now behind us and now we are entering into a period of bearish seasonality.
Just more food for thought.

Andy’s Market Report – January 30, 2012

Tuesday, January 31st, 2012

Have you seen the VIX lately?

18.53? Seriously?

Well, some of you asked for it and now look what you get in return – low options premium. Sellers of options need volatility, we thrive on volatility. Volatility is our friend.

But volatility is at a six-month low, which raises hopes that a calmer market will bring in more investors. There is certainly no doubt that most risk is tied up in bonds right now, but once investors are willing to take on more risk they will move back into the stock market. The question is when.

“Lower volatility is like a security blanket for retail investors. It allows them to invest for the long term,” said Ben Schwartz, chief market strategist at Lightspeed Financial, the retail broker. “Investors remain nervous about the eurozone crisis, but money is beginning to trickle back.”

Although investment banks and their institutional clients are not convinced that volatility will remain low. Because, low volatility equates to a low-price hedge against a sharp market decline.

“With Vix levels so low, this is a good time for investors to put on hedge positions,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital. “Even if you have a bullish view on the market, you can buy downside protection for your portfolio at low prices right now,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital.

And the smart money or commercial hedgers (among the largest traders in the market) have gone net short on Nasdaq, Dow and Russell 2000 futures.

This is telling.

Because when commercial hedgers move net short the market typically witnesses a correction shortly thereafter.

Whether or not we see a decline soon is THE hot question right now.

For the last three weeks it’s been like the movie Groundhog Day. Every day I wake up and market moves higher.

But the bearish indicators are piling up. But the tower of stacked pennies inevitably falls when it does – it typically comes crashing down.

Unless, we have truly entered into a market environment where investors are moving money off the sidelines and into the market then this bull run could continue. But the numbers just aren’t there. Volume is incredibly low and has been throughout the majority of this bull rally.

Has it been a bear trap all along?

Maybe so, maybe not, but one thing IS for certain, with the market at these elevated levels the risk is to the upside. Trade accordingly.

Making 36%

Making 36% — A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

Order Now

Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins