A marketing email for a particular market-timing website came across the desk a few weeks ago here at Condor Options HQ, and the copy was funny enough that we decided to look into it. Elliot Wave theory is touted by some as the holy grail of technical analysis; to others it’s a vague and subjective kind of sideshow chicanery. Its practitioners (for example, pictured at right) seem to fall all along the continuum of competence. Now, far be it from us to cast judgment on the analytical tools that someone uses to do their trading. Trading is one of the most pragmatic disciplines possible: who cares what your tools are called or what they look like, so long as they produce results, right? Heck, we trade a strategy (the iron condor) that is also the name of a LEGO toy!

But seriously:

Today’s top was a spike, on news, so our feeling is it represented the top of wave {a} of an {a}-up- {b}-down, {c}-up move for corrective wave 2-up. This afternoon’s late decline was likely the start of wave {b}-down. The alternate is that wave 2-up topped intraday.

It’s not that we don’t understand the individual words and phrases of this kind of commentary, or even what the author is trying to say. And maybe this is just pure analytic genius.

Or maybe it’s completely untradeable, unverifiable, unfalsifiable hindsight-driven smoke-and-mirrors carnival gibberish.

If the Fed cuts rates, but that action isn’t “news” to anyone, is a selloff still a case of “selling the news”? If Fed Funds rates fall in a forest, and there’s no one around to buy equities, do the cuts still make an impact? (Okay, bad pun.) The market sold off today after rallying hard on the completely telegraphed and fully expected Fed 50bps cut. Anything less than 50, given today’s action, would have probably caused a mass panic or something. Even so, futures are down pretty hard after hours, so we might test those recent lows sooner than expected. After all that whipsawing today, the VIX was basically unchanged.

We’re not a daytrading blog - you already know that. But today’s bonus trade was just about as close to a perfect intraday market call as you can get. We hit “Publish” at 3:08, and granted, the indexes had already put in their tops a couple minutes earlier. But if you caught the email and grabbed some puts, futures, short stock - anything - even seven minutes later, you still had a ride of almost 200 Dow points below to enjoy before the closing bell.

Of course, even with a trade this sweet, people complain. Problem #1: not specific enough. Well, when a post is titled “get short” and all of the major market indexes are discussed, the idea is just to short something, anything. Remember, these bonus trades are for fun, so you shouldn’t be playing with any serious money anyway; but really, provided that you weren’t shorting any of those 2X Ultrashort ETFs (which would put you ultra-long), just about any other long puts or short stock or short futures in existence would have paid off this afternoon.

Problem #2: too late. Well, yes, there was some kind of delay in our broadcast messaging server, so the email notifying people of the post didn’t go out until some time later. That stinks, but it’s also just another reason why using an RSS reader will always beat the pants off of any email subscription. The notification of the post showed up in RSS readers immediately. (What is RSS?) There are links to the RSS feed at the end of this (and every) post, so please subscribe to it.

In any case, don’t sweat this stuff, these little trade ideas are totally free, they aren’t officially tracked, and they could just as easily turn your pristine trading account into raw financial sewage. Sometimes people ask us if we publish bonus trades just so we have an excuse to write more silly disclaimers. The answer: yes.

Big rally on this Fed cut, but indexes are looking short-term overbought.  No time to get fancy or detailed, and it doesn’t matter much: the only really major consideration is that financials are rallying particularly hard on this news, so you might want to avoid SPY/SPX, and go more for the QQQQ/NDX or possibly DIA/DJX route.

We’re just nibbling here, not making a huge play or anything.

The liquidity issue is absolutely important, no matter whether you’re working with a small personal account or a massive hedge fund. There’s a sense in which most - maybe even all - of the financial crises in modern history were caused by illiquid positions and portfolios. While the failure of Long Term Capital Management, for example, was triggered by the Russian default, the liquidity issues the firm faced meant that any number of other surprises or scenarios could have triggered a similar crisis had Russia not been the circumstantial catalyst. The situation with CDOs and sub-prime debt in the US is a similar case: even if borrower default had started later or had been less intense, the fact that these positions are so hard to unwind meant that any substantial change in sentiment would inevitably cause a downward spiral in which people looking to exit would be forced to accept ever lower prices, causing more bag-holders to look for exits, driving prices even lower, etc.

The same thing happens all the time during options expiration - that’s why gamma risk is so deceptive, and why you never really notice it until it smacks you in the face. We’ve heard some stories lately about people who were stampeding out of crowded put strikes having trouble finding buyers. This kind of thing can get really nasty if you’re with some trading service or other and they stick you with a position that doesn’t have enough volume to make a timely exit possible. Even if you’re working with index ETF options - some of the most liquid derivatives on the planet - you can still have some trouble if you get marooned at a lonely strike somewhere with mere hours until expiration. We won’t name any names, but it seems that more than one other iron condor service had just these kinds of problems last month.

A couple people asked if we were prone to those same risks, which is a totally fair question. Here’s what we do to keep things nice and liquid:

1. We only use index ETF options. Sure, you could technically trade condors or credit spreads on anything that has listed options. But check the volume on both the underlying and the options themselves - if it’s not really heavy, expect some liquidity hassles. The vast majority of the time, the options on the major ETF indexes (SPY, DIA, QQQQ, IWM) are more liquid than a tourist during Oktoberfest.
2. No rolling. We never roll positions from month to month: if we don’t like a set of strikes near expiration, chances are we won’t like them by next expiration either. (Newbies: rolling refers to the practice of simultaneously closing one positinon while opening another; you can roll up or down within the same month, roll to an identical strike forward in time, or roll up or down forward in time.) More importantly, while rolling can save you a bit on slippage sometimes, if you’re trying to exit in a hurry, it just makes your order that much more complex, and that slows things down.
3. We’re on a permanent diet. That is to say: we limit the number of subscribers we’ll accept at any one time, and we only increase that limit when we’re confident that our member base is still small enough that we can all stay liquid.

Remember, it doesn’t matter how much money is at stake, what kind of strategy you’re using, or what your positions look like - if your positions aren’t liquid, they’re not worth having.

• 1 - The Big Picture | 625 Point Dow Intra-day Swing: Where does it rank?
  From down 326.38 points at the low, to closing up 298.98, yesterday was one of the biggest Dow point swings in history. But in percentage terms, yesterday did not even make the top 10 — it was #30!
  (tags: dow markets)