Roger Ehrenberg has it exactly right:

It doesn’t take a rocket scientist or the Amazing Kreskin to see that things suck out there. In the real economy. Being excited about lower rates is only part of the equation. Sure, you are discounting back future cash flows at lower rates and therefore increasing the present value, but what exactly are you present valuing? I’ll tell you what - lower future cash flows.

I mean, it should be obvious to people: a “potential future rate cut” party is loads of fun and all, but it’s a darn poor substitute for a healthy and well-ordered economy. Celebrating the possibility of a further emergency rate cut by an increasingly concerned Fed is like getting all excited because the experimental last-ditch chemotherapy didn’t shut down every organ in your body.

Wouldn’t it be better to not have the cancer in the first place?

A new feature here - just some links to pieces we found worth reading. If the mainstream financial media is noticeably absent from this and future lists of interesting and relevant articles, well hey, that’s not our fault.

• The S&P500 just hit its 1 week, 1 month, and 3 month lows. Yikes. [The Big Picture]
• John Hussman has some good analysis of the upcoming recession and how to deal with it. [Hussman Funds]
• The current state of the major indexes; including lows likely to be tested. [Trader Mike]
• The Options Insider is an interesting resource for industry, brokerage, and other developments in the options world. [The Options Insider]
• The Ticker Sense blogger poll, an increasingly reliable contrary indicator, set a new bullish record this week. Yikes. [Ticker Sense]
• On the one hand, Lenny’s “double down until you’re right” strategy is obviously not one any sane person would follow, so maybe everybody shouldn’t be so harsh. On the other hand, Lenny’s “double down until you’re right” strategy is obviously not one any sane person would follow, so why does he have a column at TheStreet.com? [Daily Options Report]

And if you haven’t already read our article from yesterday about trading condors in high volatility environments, you should go check it out: Volatility is Your Friend.

Oh, last thing: we’ve taken on some new members over the past couple weeks.  If you’re a new member and you haven’t visited the New Member Page, you won’t receive trade alerts unless you do!

Bill Luby is thankful for several things that have helped his trading in 2007. Among them is the use of:

10. Iron condors and other strategies to capture premium associated with high volatility and/or non-trending securities

This raises an interesting point. It’s pretty common for people to approach us with questions about the right time to trade iron condors, and one of the most common assumptions they make is that it’s better to trade condors in low volatility, non-trending environments. This is an understandable assumption, but it’s totally false.

The best time to trade condors is in high volatility environments, regardless of the trend. So there are actually two points to be made here.

1. High volatility is your friend

Now we could talk about the nice, fat premiums you can get when fear is high and others are acting cowardly. But instead, let’s think about the worst case scenario for any given condor - namely, a huge market move that blows past both your short and long strikes on one side of the trade. That means you’ve hit your maximum loss, the trade is likely busted for good, etc. This is the danger to be avoided. Now, there are two given market environments in which you can trade. Environment A is characterized by a lot of lazy sentiment and low volatility readings. Environment B is characterized by rampant fear - bordering on panic - and high volatility readings. The question is: in which environment are you more likely to experience a trade-busting event?

The answer is Environment A: in the world of A, nobody is expecting a sizable move, and therefore no one is pricing such a move into the options. In the world of B, however, everyone is already on alert, some extra premium has already been added, and when that big move comes, we’ll likely be okay because that extra premium will have allowed us to construct our position with wider strikes than normal. To put it another way, condor traders trade volatility, and there are basically four ways things can shake out during the life of a trade:

So the best-case scenario from an implied volatility perspective is one in which IV is high when you open the trade, and then some volatility crushing event happens during the trade so that by exit/expiration, IV is low. The two next best cases are ones in which the IV environment is basically unchanged over the life of the trade. The worst case scenario is one in which you start in a low-IV environment, and then the IV of your options jumps on you. We marked this as dangerous because increased IV premium means your position could be underwater even if the price of your underlying doesn’t move much. It also means your current position may not be pricing risk appropriately.

One other thing to point out about that little chart: the only worst-case scenario occurs when you trade during a low-IV environment. So while it’s pretty counter-intuitive to be putting on iron condor trades when the rest of the trading world is freaking out, our analysis suggests that this isn’t just a great opportunity - when handled properly, it’s the safest place to be.

Plenty of selling today, sure, and the foreign markets don’t look ready to provide any help any day soon. (Glad we’re not China A-share holders.) So this could turn into an ugly holiday season.

But there’s always a bright side, and its name is volatility. Consider the following facts:

1. Implied volatility in SPX is right back up to its August highs, which, as you’ll recall, are the highest levels seen in years. Note that we’re using the 90 day reading rather than the usual 30 day, because all the short-term data is screwy because of the holidays.
   
2. The VIX, on the other hand, is nowhere near its August highs. Even with today’s 8-10% pop, a 27 reading is still some distance from the 32.50 - 37.50 range we saw on August 16.
3. You can sell volatility. Maybe the obvious choice is VIX options, but those are a lot more complicated than they look, and should probably be avoided if you’re not prepared to deal with all their moving parts.

Instead, why not sell an iron condor, on the thesis that things may settle down a bit (regardless of which direction) as people check out for Thankskwanzanukkahboxingdayistmas? Our members are already well positioned, but if you want to join in on the market-neutral fun, you could sell the Dec SPY 133/135/150/152 iron condor for a credit of about $0.86. For those of you who are new to all this, that’s

+1 Dec SPY 133 put

-1 Dec SPY 135 put

-1 Dec SPY 150 call

+1 Dec SPY 152 call

for a net credit somewhere in the neighborhood of 0.86, or $86 per position. Like any other trade, these things can be tough to fill sometimes, so don’t be a jerk about your price - you have to tweak things sometimes to get your order filled.

Last thing - usual “bonus trade” disclaimers apply, even though this is an iron condor. This pick isn’t being autotraded, it’s not going in our performance ledger, it might never be mentioned again, it may lose you money, and it will scare your aunt Judy and steal all of your children’s toys. Now stop trading and reading blogs, and go talk to your family!

Question: What’s the only thing stupider than stealing easily searchable content from someone else’s website?

Answer: Stealing easily searchable content from someone else’s website, and then being dumb enough to link back to them.

[UPDATE: We made the mistake of notifying them of our copyright just before posting this, and they quickly pulled the offending page. Here's the imageless Google cache version. Only time will tell whether this is a site run by complete morons, or simply a cheap imitation of our honest work. Given how shady and bizarre the newsletter industry generally is, they will probably spend all their time on marketing instead of trading, make lots of quick cash, and retire early.]