Thoughts

After we broke the neck line from the head and shoulder pattern we continue to see more down side pressure. Now one thing that we all should look for is a snap back rally to the neck line, or commonly called a dead cat bounce. The probability of a snap back rally is high, if you are short delta I would lighten up or just be mindful that we could have a 20-30 point snap back rally before we see more down side pressure.  Currently all the major indices are about 5 standard deviations away from the 50 day moving average, and on average we typically don’t get that far away for the 50 day moving average without a snap back rally.

The RUT is in a falling wedge pattern and I think we will continue to see the RUT stay in this pattern until we get a catalyst to push higher out of the pattern.

EUR/USD is also showing signs of bullish activities. Currently we are building a inverted head and shoulder pattern and a break above the neck line would be extremely bullish for the EUR/USD.

Broken Neck Line

I hate to sound bearish and very pessimistic, but today’s late day sell-off is a warning sign that the next few weeks/months could be very volatile and quick.  As many of you know my support level was 1040 and today we broke below that level and closed below that level with a lot of weakness.

The chart is exploding with bearish signs from the head and shoulder top to the new low we made today.

The head and shoulder pattern has been building over the last few months and today we broke the neckline.  Not to scare anyone but the average decline after the break of a neck line is 22% that would put the SPX around 800.

Higher highs and higher lows is a great bullish pattern, but what we have on the SPX is lower highs and lower lows. Today that pattern continues as we made a lower low today.

All in all 800 seems a bit crazy but some extra insurance would be highly advised. As for me I will be looking to add some short Deltas after a pullback to the neck line around 1040.

Follow My Option Trade: Update

Follow My Option Trade: Closed

The market as of late has been feeling like we are on edge and could fall back to the lower support point of 1040. Even with today I feel less enthusiastic about the market staying positive.

This was a good month for our Follow My Option Trade butterfly. Total margin used $12,820 total commission $219.00 and total profit after commission is $1836 up 14.32%.

It May Be Insurance Time

Weakness across the broad yesterday with implied volatility rising about 2%, just when you think things will be calm a storm rolls in. The biggest thing that caught my eye yesterday is the fact that we break our level of support. So what does this mean? I think if we continue to see weakness after the FOMC announcement today I will start considering some short Delta insurance. The insurance will likely be in the form of a put spread. Setting insurance is a great thing, but make sure when you do set your insurance you are not destroying your risk graph. One way to do this is by cutting your position in half, it takes less insurance and less risk to protect a smaller position.

At this point I will be patient to see what the FOMC announcement will bring.

Follow My Option Trade Update: Below is the risk profile for this months butterfly.

Upside Risk or A Selling Opportunity?

Long Delta, positive Theta and short Vega with this type of tape is the best kind of strategy. Over the last week I talked about getting long Deltas to hedge for upside risk, and for the traders that bought some Deltas, today should be a good day. Now if you are looking to put some long Deltas in your portfolio I still think you can, just be careful of selling pressure as we approach overhead resistance. Below is the position I put on last week, a synthetic covered write on IWM.

Follow My Option Trade Update: No adjustment

This morning we made it to an adjustment point, but I want to wait and see how the morning plays out before I make a decision on what we should do. Currently the market is pulling back and the internals seem to be weakening. If we continue to weaken I will hold off on making an adjustment. If the internals start to strengthen I would consider making an adjustment.

The chart of the SPX is approaching overhead resistance, which makes me want to be patient with an adjustment.  A break of resistance would be extremely bullish and at that point I would consider adding more long Deltas.

Its all about the RUT

Over the last few weeks we have had a frustrating instrument that has taken good traders behind the wood shed, the RUT. Studying the chart this morning I wonder why anyone would want to trade such a high beta index. The choppiness alone would stress out any trader, but the RUT has some very good qualities to it. Now I am not anti-RUT, I still think income trades can be traded on the RUT, just with extra protection.

The technicals are fairly cut and dry, but I think 2 scenarios could play out.

1. Falling Wedge (Channel Wedge) -On the chart the falling wedge is highlighted by the two down sloping trend lines.
2. If price can break through the pink overhead trend line on strength we could be headed higher to about the 50 day moving average. But as of now the support is 650 and resistance is the 50 day moving average. And for me to get bullish on the RUT we would have to close above 720.

With all that said most people would ask what type of spread I play for the two situations. Well first I would pick 1 or 2 and I think I like the second situation better, and with that second situation I would assume volatility would continue to fall. I would probably look for a short Vega neutral Delta spread. I would stay very conservative with how short my Vega was. I would not want to be super aggressive with the short Vega.  My best bet would be for a condor, and below is something I would do.

Price Action

Yesterday’s price action was very amazing as we pushed through resistance and closed outside the range. A move like this can only mean two things, either stops got hit on the other side of 1100 or the shorts are tired and real buying came in. Either way it’s a breath of fresh air.

Now I think the situation is changing, the first thing is 1100 is now support and we need to stay above this level if we want to go higher. The next thing I am looking at is the overhead resistance level, which I am calling 1140-1150 or roughly where the 50 day moving average is. I think if we stay above the 1100 level we could build some good momentum to the upside during the next couple of weeks. A few posts ago I mentioned upside risk and hedging for a potential push higher, and we may have just started the next leg. Today I will be buy long Deltas.

Above is a picture of a resort I live next too, this time of year is the best in Colorado.

Batman Butterfly: Follow My Option Trade

Today seemed almost relaxing and with the SPX making a 1 standard deviation move we had to make an adjustment. After I made the adjustment the market decided to retrace the gains to close down 1.97. The decision to make an adjustment was very hard, because 1100 is a resistance point and was also my adjustment point. We were struggling most of the day to push above the level and when we finally did the market reversed.

The VIX also was below 27 today for a short period, and with a VIX under 30 I feel more comfortable about a slower moving market. Although I would like to see the VIX below 30 for the next couple of days to be reinsured about my comfort. I expect the VIX to be range bound for now, and as long as everything is good a range of 30 to 22 would be a decent range to play income spreads.

The SPX ended the day with a bearish topping candle, but the short term trend is still range bound.  Although the price action to me is sideways and choppy, we could be building a base and might have upside risk after expiration.

Below is the Follow My Option Trade risk profile.

Follow My Option Trade: SPX

Yesterday I set the Follow My Option Trade and below is the risk profile.

This month I did buy some insurance both on the upside and downside in the SPY. Sometimes when volatility is high, hedging for upside risk is a good bet. Like always I will continue to manage this butterfly and keep the community updated on any adjustments.

I’m Back with a Follow My Option Trade Update

Sorry for the no show the last few weeks, my wife and I just bought a new house and were in the process of moving. I only had access to the internet for the opening of the market and if I was lucky the closing bell. Now we are all moved in and the internet is up and running.

Follow My Option Trade: Update

During the little time I had I would manage the SPX position we have on. We saw a low of 1040 and a high of 1170 and I adjusted this fly less than I did with last month’s RUT butterfly. And today I will be taking profits off the table.

At this point the market is building a small symmetrical triangle on the daily chart. With 70% of symmetrical triangles breaking out in the direction of the trend I would have to say if the pattern plays out we could see more down side. But my thoughts are that we will push higher based on a few key indications, and my short term target is the 50 day moving average around 1135. If we break through the 50 we could easily retest the highs made earlier this year. After we test the highs I think we will build a wide channel or range and trade in that range the rest of the year. Basically I think we saw the high and the low for the year.As I was writing this post I closed out the FMOT and before commissions we are up $8,175.00 we used a max margin of $13,550 thats up a massive 60.33%. Some of you might be wondering how I made so much money? The simple answer is when I set the butterflies the volatility was at the high end of the range, allowing me to pay less for the butterflies. As volatility came back down the price of the butterflies increased due to time decay and lower volatility. A month like this doesn’t happen all the time, but I still think insurance is need and the size of the position should be reviewed.

We have about 7 days till we set another butterfly.