Weekend Market Commentary 10/2/15 – $RUT, $RVX, $SPX, $VIX, $VXV

Big Picture:

Late in the day Friday I sent out a Tweet with the image below.


Sometimes the markets seem totally ridiculous on an intraday basis and the price action on Friday was a prime example.  Apparently, an aggressive buyer (or buyers) decided to enter the market and drive it off the lows after a crash lower following bad data.  That sort of activity makes skeptical traders (and I’m sure it’s more than just me) wonder if someone is manipulating the market.  It’s both totally ridiculous and, at the same time, irrelevant from a trading standpoint because we can’t control it.

I spent a lot of time zoomed out on longer term charts this week looking for perspective.  From a price standpoint, the correction we’ve had isn’t that significant.  What we’ve seen in the past two months hardly qualifies as a true crash, but is that because it’s still playing out?  We won’t know until after it happens or doesn’t happen.  In the meantime, we might as well just focus on making positive expectancy decisions.

Right now the market is buzzing back and forth and a true trend hasn’t really emerged.  We had a big break lower that’s been followed with a wide range consolidation.  Until something changes, I expect that to persist.

Volatility was not significantly bid higher this week even when the market moved lower.  Additionally, the VIX:VXV ratio has failed to pop higher.  Those clues suggests that either insurance has already been purchased or people are selling out of the money options on moves lower.  As much as it pains me to say it, neither of those scenarios is particularly Bearish.

This was a somewhat active week for me from a trading standpoint.  The big ranges we’ve seen have forced me to move around my position more than usual.  In fact, I though I might end up rolling the Butterfly lower twice on back to back days.  Fortunately, the market found some footing and that wasn’t necessary.

Market Stats:


Levels of Interest:

In the levels of interest section, we’re drilling down through some timeframes to see what’s happening in the markets.  The analysis begins on a weekly chart, moves to a daily chart, and finishes with the intraday, 65 minute chart of the Russell 2000 ($RUT).  Multiple timeframes from a high level create context for what’s happening in the market.

Live Trades . . .

The “Live Trades” section of the commentary focuses on actual trades that are in the Theta Trend account.  The positions are provided for educational purposes only.


The November Butterfly is moving along and has a slight open profit.  The trade began at 1130 and has been rolled lower twice.  The trade is centered at 1090 after the rolls lower.  The risk graph below includes one of the two adjustments.  The second roll created a gain of $8 after commissions so I decided to leave it off the risk graph because it’s essentially irrelevant.

The CIB (now renamed to Core Income Butterfly) has evolved into my primary strategy this year.  After the strategy made it through the crash lower and then higher last October, I realized that the dynamic nature of the trade had some promise and I began focusing on it considerably.  This year, the October CIB successfully went through Black Monday and then the move higher despite some mistakes on my part.  The trade has been very consistent with low directional risk (two of my favorite things).

RUT Nov Options Butterfly

For those of you who found the discussion about the Migrating Butterfly strategy interesting, I thought I’d include an image of my November trade below.  I’ve been trading the strategy in a very small IRA as a way of forward testing it.  The small size makes commissions more challenging, but using a 7 point wide Butterfly in $SPY helps overcome that disadvantage somewhat.

In the Migrating Butterfly shown below, the adjustment add point is around 198.50.


Looking ahead, etc.:

As I mentioned above, I think we’re just in a big range right now.  The Russell retested the lows this week and moved higher.  If the market develops a patterns of higher highs and lows on the 65 minute timeframe, it has the potential to get above the 1130 level.  Getting and holding above that level is likely to move price back towards the higher end of the consolidation.  I guess I’ll come back and trade next week to see how things play out.

Thanks for reading and have a great weekend.

Please share this post if you enjoyed it.

Click here to follow me on Twitter.

Want to receive an alert as soon as the next market commentary is posted?

Theta Trend System Document

Sign up for my email list and stay up to date with the latest information on options trading.

Click here to sign up for the list, get a copy of the Theta Trend Options Trading System, the Trade Tacker I use, and information about new systems.

Even better . . . it’s all totally free.

  • The Lazy Trader

    Hey Dan,

    I’m curious about the VIX:VXV ratio. Have you used it in your own trading? What do you use it for and how? Perhaps it would be good for a separate article on its own.

    Thx for sharing your perspective this weekend.

    • Hi LT and thanks for the comment. I watch the ratio for sentiment purposes, but I haven’t used it specifically for signals.

      As you probably know, the term structure of vix futures normally trades in Contango. In Contango, we know that contracts closer to expiration are trading at a discount to back month contracts. When the market falls and people get scared, they tend to bid up front month options more than back month options. That bid can invert the VIX term structure and short dated options end up with higher IV than longer dated options. I’m using the VIX:VXV ratio as a simplistic way of looking at term structure.

      Specifically, I’m looking at VIX:VXV to objectively illustrate 30 day (shorter) to 3 month (longer) IV. As you can see from looking at the indicator, when the ratio trades above roughly .92 things can get ugly. When it trades above 1.0, things probably have already gotten ugly. The one thing we know for sure is that if the market is crashing, shorter dated options seem to trade with an IV higher than longer dated options.

      The extension of the discussion is how we can use the ratio for trading. The problem is that the indicator seems to lag price. I initially became interested in the ratio for trading VXX and XIV, but I got sidetracked with other projects. I’m also interested in how it might be useful for hedging downside risk, but I haven’t found anything conclusive yet. Right now I’m just monitoring it for sentiment purposes and as a way to confirm price action.

      Thanks for the suggestion on a separate post and I agree. I’ll pull something together in the next few weeks.


      • “The one thing we know for sure is that if the market is crashing,
        shorter dated options seem to trade with an IV higher than longer dated

        In this scenario, would you consider selling front-month spreads? Like you I don’t like to sell front-month spreads due to gamma risk.

        You are truly a wealth of knowledge in these strategies which are foreign to me. I like the fact that all of us have different strategies to share with each other. Thanks Dan.

        • Hey Jonathan. Sorry, I totally missed this comment.

          Personally, I don’t like selling short dated options. Additionally, high IV doesn’t necessary make me race in to sell premium.

          I’m like you and prefer low gamma. Part of why I like trading Butterflies is that I can keep my directional risk under control. When I do sell high probability verticals (8-10 delta) I feel like I’m sitting around hoping that the market doesn’t take me out. Those feelings are stronger the closer to expiration I sell. I guess that’s a long way of saying, no, I wouldn’t personally sell front-month spreads.

          When you sell spreads, it seems like you usually sell 100-120 days (maybe even more). With that amount of time and distance, I’m not too concerned and can sit in the trade comfortably. Normally, I like to sell 80-100 days out, but it’s definitely not my specialty like it is yours and I don’t even trade them every month.

          Thanks for sharing your strategy as well. I enjoy reading your commentary and agree that it’s great to have the collaboration!


          • Thanks Dan. I get the same feeling when selling longer dated options. You are just hoping nothing bad happens while you are in the trade. But the good thing about going further out is that you have plenty of time to adjust your position when something goes wrong. Traders who do short dated options like weeklies can get killed if the market does not cooperate for them. I have experienced it myself thus my preference for longer dated options.

          • Yeah, I really like the distance and time you give your positions to breathe and work themselves out. I’m not a big credit spread trader because they don’t totally jive with my personality, but I definitely prefer your style to the gamma fest that comes with weekly options. I’ve been burned on weeklies as well and I know exactly what you’re talking about.

  • Klng

    Thx for your sharing!