First, let’s tee up the VIX, because there was a point there today when it sure as heck seemed like the apocalypse was upon us: [note: these are all 15min charts]
Where I come from, a VIX with a 37 handle is nothing to joke about. On the one hand, it’s kind of paralyzing when none of your subjective models of options pricing apply, none of the market makers know what pricing models to apply either, and nobody wants to be the tragic hero sucking up all the bids. Around lunchtime, we did three things, all of which have worked out well so far:
- Didn’t trade VIX options. Why? Because we’re not insane. Trading actual options on the VIX is like trading options on the reinsurers of the reinsurers of companies that sell insurance against hurricanes - you have no idea what you’re actually buying or selling, how that instrument will react in a crisis, etc. Question for any other options nerds out there: do the traditional Greeks function in any normal way with VIX options? Somehow I assume not.
- Sold some put spreads around lunchtime, mostly on the better performers like RUT, IWM. It’s really criminal how the mainstream media (I’m looking at you, CNBC) pushes large caps every hour of every day but gives absolutely no love to small caps. Anyway, these spreads are obviously defined risk, yet still risky, and they have played out so far much, much better than they should. We’ll get to that in second.
- For our members, we didn’t touch a darn thing. The easiest and fastest way to destroy any iron condor is to adjust the position every time the market sneezes. Sure, the “sneezes” we’re seeing this summer are louder and wetter than usual, if you’ll forgive the gross metaphor, but we can’t choose the direction or volatility of the markets, only whether or not we react in a disciplined way.
Moving on: check out these intraday bounces in the DJIA and the RUT:
The official word from Briefing.com is that short covering in the financials triggered the broad rally. I suppose that makes sense, given that the financials have certainly been showing us the way down in recent weeks. The real question, though, is whether a little bit of good news for Bear Stearns and Fannie Mae is enough to start turning the news cycle around. On the one hand, who knows whether a solid and sustained 10% drop is enough to work off the absurd abuse of liquidity that Greenspan allowed to develop (…probably not). On the other hand, we’re certainly not hoping for a bear market.
Actually, we’re not hoping for anything in particular - that’s kind of the whole point of trading, ahem, market neutral.
