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Weekend Market Commentary 4/1/2016 – $SPX, $VIX, $VXV

Market Stats:

4.1.16marketstats

Big Picture:

“If it wasn’t this, it’d probably be something else . . . ” -Line from a Elizabethtown.  Yes, I’m embarrassed to quote a cheesy, mainstream romantic comedy and, sadly, it’s the most fitting quote for today.

And on that, all I’ll say is that I’m sure glad that it’s over with.  For many (if not most or all) non-directional options traders, 2016 has been a tough year.

The month of March just ended and from a trading standpoint it was good even though the sample account had the first monthly loss in quite some time.  The outcome is to be expected when you look at the positions we had on combined with the move higher and steepening ATM skew.  Even though losing trades aren’t fun, we followed risk guidelines and are in a position to recover the loss without major issues.

The other day I was thinking about the markets, economics, politics, and, of course, the steady state of decline.  Surely, you weren’t hoping for something more rosy this morning . . .

At any rate, when the market goes against us it’s easy to get upset with the factors that “drive” the market.  Specifically, I want to be mad at ‘ol Janet and blame her for making it challenging to carry short delta positions.  Additionally, I hate our political environment and the fact that politicians are effectively above the law.  For you House of Cards fans, I firmly believe that Francis Underwood is modeled after Mrs. Clinton.  Frankly, I find it hard to understand how some of the things we see taking place actually take place.  Seriously, who are these people and how did we get here?  At the same time, we’re here to trade and what matters on a day to day basis is the market.  As far as that goes there’s always going to be something and if it wasn’t this, it would definitely be something else.

As human beings we have a tendency to want to identify the cause of our pain or suffering.  When things don’t go our way, we like to blame someone or something for that outcome.  Anger is a curious emotion.  From a trading standpoint, the best things we can do are step back, be humbled, learn from the lesson, and move forward.  The causes of the market environment matter in a life sense, but they don’t matter in a trading sense.  Our goal is to make positive expectancy decisions regardless of what’s going on rather than to become frustrated about why things are happening.

On that notion of why, it’s hard to understand what’s driving the market higher.  For the time being, we haven’t seen any signs of short term weakness and all we can do is monitor previous support for potential breaks.  On the upside, we can continue to look at potential resistance areas, but those levels are only potential until they hold.  At this point, the only glimmer of hope for a pullback comes from the now very depressed volatility and volatility ratios (VIX:VXV).  Until we see some support failures on the shorter term timeframes, all we can expect is more of the same.

Volatility:

The slight increase in the IV – HV spread that we saw last week widened a little more this week as both IV and HV continued lower.  Both are at very low levels in the context of the past year.
4.1.16.SPX.hviv
The VIX:VXV ratio is also extremely low and the 10 day simple moving average of the ratio is the lowest is has been since 2012.  When we’ve seen volatility ratios this depressed, pullbacks have tended to follow.  While that outcome is possible, we haven’t seen any sings on the shorter term timeframes to indicate that it’s happening.
4.1.16.SPX.vixvxv

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 monthly chart, then weekly chart, moves to a daily chart, and finishes with the intraday, 65 minute chart of the S&P 500 (SPX)).  Multiple timeframes from a high level create context for what’s happening in the market.

S&P 500 – $SPX (Weekly, Daily, and 65 Minute Charts):

4.1.16.SPX.weekly
4.1.16.SPX.daily
4.1.16.SPX.intraday

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.

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The April5 $SPX CIB was adjusted higher this week with continuation of the move.  The trade is inside of 30 DTE and we’re going to be looking for the exit soon.

For more information on this trade, check out the Live Trade Page with daily video updates and comments.

$SPX April5 2016 Core Income Butterfly Trade:
SPX.Apr5.CIB
If you want to learn a safer, less painful way to trade options for income, check out the Core Income Butterfly Trading Course.

Looking ahead, etc.:

I’ll be monitoring volatility and volatility ratios into this week as well as price action on the 65 minute timeframe.  Due to the size of the move higher, the market has the potential to pull back but we don’t see any indications of that happening yet.  In the meantime, it makes sense to cautiously defend the upside.

Have a great weekend and please share this post if you enjoyed it.

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  • “From a trading standpoint, the best things we can do are step back, be humbled, learn from the lesson, and move forward.”

    It surely has been a difficult year for non-directional trading strategies. Not all strategies will work all the time and we have to accept our losses as easily as we accept the wins. I think our high probability trading strategies have such a high rate of wins that it is hard for us to acknowledge that we can have some losing trades too.

    • Dan

      You’re absolutely right Jonathan. Even though the odds are in our favor, it doesn’t mean that we can’t or won’t have losing patches. The important thing, as you know, is to keep the losses under control so we can bounce back. It’s never fun, but it’s part of the game.

      Great commentary today by the way, the big back and forth moves have been challenging for all these strategies. Here’s to a better April!

      Dan

  • Jürgen Röger

    Dan, I follow you for some time now – and with every post I am thinking again: You have too much opinion about the market direction … you are too bearish. We don’t know the future and everything ist possible. Be prepared that the S&P will break the 2134 and be prepared that it will break the 1980. But it seems to me that your trading system is more vulnerable on the upside?

    • Dan

      Hi Jurgen, yes and no. I am frequently bearish and, at the same time, I recognize that stocks tend to increase in value over time. Asset prices in general have risen over time. Even though I’m frequently bearish, I don’t sit in positions without adjusting or saying the market will pull back.

      I agree that anything can happen and I go into trades with the expectation that I’ll adapt to whatever happens. Incidentally, if you watch some of the daily videos you’ll see that I’ve been saying for some time that on the shorter term timeframes we still haven’t seen any reason to question this advance.

      In regards to the system, it’s not quite as clear as being vulnerable on the upside. Changes in skew impact the positions and the transition from flat to steep skew can be worse for some positions than the pure directional movement. With the non-directional strategies my goal is to remain relatively neutral even though the CIB does tend to prefer down moves.

      Now, all that being said, I’ve been trading some BWB positions alongside the CIB in an effort to add some diversity. Those trades don’t mind steepening skew in the same way and handle up moves better. That diversification is partially because I believe the market is unpredictable and I want to diversify.

      One of the challenges with carrying long delta vs. short delta is that it’s more challenging to construct positions due to skew. Put skew makes it easier to construct favorable short delta, low gamma T+Zero lines. Call skew doesn’t present the same opportunities.

      Thanks for the comments.

      Dan