VIX Bull Call Spread

The broader market continues to rise and burn traders looking to short it.  The SPX closed at it’s all time highs.

However, at some point in time there will be a pull back.  One way to play this is by going long the VIX which has been hovering around the 12.50 to 13.50 range for the past several trading sessions (towards the lower end of the yearly range: 11.30 – 26.66).  Basically looking at a mean reversion scenario.

A bull call debit spread is one way to trade this.  The June 13 13/15 call vertical (37 days to expiration) is currently priced at 90c.  For a 10x vertical, we’re looking at a max loss of $900 and a max gain of $1,100.  The BE is at 13.90.  The current probabilities indicate a 30.64% chance of VIX moving north of 13.90 by June expiration.  However, keeping the mean reversion theory in mind, I am not too uncomfortable with the scenario.  Look to get around 15% of max risk.

SPX Directional Butterfly

Click here to view a chart of the underlying, overall position, P&L graph and Greeks.

SPX closed around 1582.  Expecting a pull back in the market.   Price making a reversal candle around the median line of the APF.  We also see decreasing momentum on the oscillator.

Using the ATM straddle using weekly options (expiring May 3) to gauge what sort of movement traders are expecting over the next week.  Traders are currently pricing around a 20 point (straddle is priced at 19.50).

Playing this via a directional butterfly centered around 20 points below where SPX is trading currently, with 20 point wings, using options expiring next week.
+3 x May1 13 1540 puts, -6 x May1 13 1560 puts, +3 x May1 1580 puts
Max risk = $945, Max gain = $5,050 based on the expiration PL graph.  Might not stay in the trade till expiration.  The position has -ve delta (gains from a drop in price).  The position starts off gaining from a  passage of time (+ve theta), with the theta increasing if price drops.

SPX Iron Condor

Click here to view a chart of the underlying, overall position, P&L graph and Greeks.

The general market has been in an up trend since mid-November.   We have broken into all time high territory.  Looking at the chart, we have a bearish divergence in place (price making newer highs in opposition to the oscillator).  While the market can continue to trend up as it has been for sometime, it might not be unreasonable for some sort of a pull back to come into play.

The play in question is to utilize an iron condor strategy (somewhat direction neutral) with some protection at either end.

The short strikes of the IC were selected with a delta of 12 & -10 for the call & put legs.
Overall position (46 days to expiration)
-10 x May 1630 calls, +10 x May 1640 calls
-10 x May 1450 puts, +10 x May 1440 puts
Credit collected = $1,700, Margin = $8,300 (discounting commissions)
Buy a protective call & put for roughly 5% of the margin cost (smooths out the current P&L  graph)
+1 x May 1640 call, +1 x May 1375 put
This reduces the credit collected to $1,305 & increases the margin requirement to $8,695 (discounting commissions)
The overall position has a slight -ve delta (benefits from a decline in price initially), which is OK, since there is a huge -ve Vega component (hurt by a rise in volatility, which would occur by a fall in price).  Passage of time would help the trade (+ve theta).

The objective is to make around 10%-12% of the margin, with a max loss of not more than 12%-15% of the margin cost.  The trade should not be held till expiration.  If adjustments are used to tweak the trade, then they should be done before reaching the max loss.  Some triggers would be the delta of the short strikes increasing by around 12-15, or when the trade is down around 7%-8%.  Various  adjustments can be employed depending on the situation, outlook & risk appetite – such as rolling out the threatened strikes, closing one end  (good side) & converting the other to a butterfly, initiating a debit spread at the appropriate end to cut the deltas etc.

Asset Class Rotation Strategy Using ETFs

This post is a bit different to the other material I’ve submitted on this blog. I wanted to try and evaluate different strategies for sector/asset class rotations based on certain criteria such as performance etc. I have been playing around with a few approaches.  Here is an example …

Using the ETF Screen site.

High Level Strategy

Universe of underlyings restricted to select ETFs spread across the “Broad Market”, “Sectors”, “Commodities”, “Fixed Income”, “Currencies”

Filtering Criteria
(Creiteria 1)
* Price > SMA 20
* 20 < ADX <= 40
ADX = Average Directional Index
Looking to capture underlyings which are trending, but not excessively deep into a trend

(Criteria 2)
Sort the list generated by Criteria 1 in descending order by the following metric …
[3 month return] + 0.5 * [10 day return]

Position Management
- Initiate a long position in the top 3 underlings identified after applying the 2 filtering criteria mentioned above.
(Split investment capital evenly across the 3 underlying)
- Re-assess every 2 weeks (10 business days)
- Close out any of the initiated positions falling out of the top 3 bracket and replace the associated dollar amount with ones that are appearing in the top 3

Results
From 1-17-2008 to 1-18-2013 (5 years) – Perf 1
From 1-2-2001 to 1-18-2013 – Perf 2

Note: Not all underlying I am using have been trading since 2001.  Some started fairly recently.

AAPL – Demand Zone (Support)

Click here to view the chart.

Not an underlying I generally trade. However, I see the 2 zones referenced on the chart as areas for initiating long positions – trading as opposed to buy & hold.
431-418 & 390-363

This is purely based on a technical set up & not based of any fundamental analysis.

GBPJPY – Potential Bullish Butterfly

Click here to view the chart.

- Potential bullish butterfly emerging on the 4 hour time frame
- Could reverse off Zone 1 (previous demand zone 1) – in that case it wouldn’t be a valid butterfly.
- Reversing  off Zone 2 (previous demand zone 2) would constitute a butterfly pattern.

Would look for price action (candlestick patterns or other reversal signs – possibly off lower time frames) at the 2 zones before initiating any position.

Silver – Looking for a bounce

Click here to view the chart.

- Approaching an area of demand.
- Confluence with the 50% Fib retracement of the AB move up
- Price also approaching the 200 SMA

Observe price action (candlestick formations etc.) once price reaches the level.

JJS – Looking for a bounce

Click here to view the chart.

The “Softs” (such as coffee, cotton, sugar, orange juice etc.) have been beaten down significantly over the past 18 months or so.  Expecting a move up in this sector in the near to medium term.  Looking to play this via JJS (iPath DJ-UBS Softs TR Sub-Idx ETN), which  invests in commodity futures contracts of coffee, cotton and sugar.

On the weekly chart …

- Price approaching demand zones.
- Possible bullish divergence developing.
- Price at 78.6% Fib retracement of last significant move up (AB).

Might wait till price is around 50 or buy a smaller position now, adding more if price goes into the demand zones.

GLD – Approaching Demand Zone on Daily Timeframe (Looking for a bounce)

Click here to view the chart.

- GLD approaching a demand zone on a daily chart (support)
- Area also confluences with the 200 SMA & the 50% Fib Retracement from the last significant move up (AB).

Would look for a bounce around the 161.20 to 159.50 levels.

S&P 500 Potential Bullish Gartley

Click here to view the chart.

- The S&P 500 index might be close to completing a bullish Gartley on the daily time frame.
- The PRZ confluences with a demand zone as well as the 100 SMA.

Would be looking for a bounce around the 1410 – 1390 area.