The Vix over 30 equals a "Sharks, Sharks, Sharks" call from the Beach Guards at Martha Vineyard.
I stopped my business as usual attitude for the non directional trading.
A vix over 30 is a signal that anything can happen in the next couple of days/weeks - up 2 standard deviations, or down 2sd's. Since my non directional trade is based on the presumption that a normal trading days stays 66% of the time within the brackets of 1sd - it is time to accept the fact that normal trading rules will not apply.
What did I do the last couple of days;
- I closed all non directional positions which were profitable. To me it makes no sense to maintain market risk while profit taking would reduce that market risk. Some position I closed were only up a couple % while their potential was multiple times more - so be it.
- I closed all non directional positions which were hurting me and which need a market up turn to become healthy.
- I still have a RUT IC and a RUT Iron butterfly working - I reduced the delta's so Monday morning can not give me any big surprise. If I am forced to make a downside adjustment I will not do it by rolling the downside position down to the next delta 20 or delta 10. Making x% on my capital at risk is not the goal anymore for this month. My main goal is giving myself a shot at getting out of this month for a scratch without risking my ability to "play" December.
- As long as the Vix is above 30 I will not enter December trades in any size.
- In the long-term side of the portfolio I closed a lot of long positions and took profits over the last month. We are blessed our Roth/401k side of the portfolio is up 15% since July 2007. I like to keep it that way. So I accept the risk of missing reading the market signals and missing out of a "big up move".
How am I playing the downside;
(some of these trades are in for some weeks now, I am not advising you to enter my trade at this point in time).
- Long BGZ covered by a Mar10Puts
- Short cash covered BGZ puts
- Short cash covered SDS puts
- Under the market SPX calendars running from Oct to Mar10 (strike 950 and 1000)
- Day trading short spy
- smaller in size short call verticals in the main indexes.
What will be my first trade to enter when I think we might have hit a "bottom"
- SPX Strangle both sides around a delta 20 - creating a delta-neutral position, which is hugely Vega Negative. My enter signal will primarily be based on the intra day vix.
I close with a last word of warning to all new traders - I truly understand the pressure you are under to proof to your spouse, family and friends that making trading your new business venture was a good step. A Vix over 30 happens twice maybe three times in decade. This not the time to take the new boat for a tour - this is imminent hurricane risk. Sit down with your spouse explain that the smartest decision is to stand to the side. Taking out 3 months of living expenses out the trading kitty will proof to be cheaper then trying to make a buck or two in this period. I write this on Halloween, I am not trying to be the bogeyman - but over the years I have seen some very disturbing things in peoples trading accounts - I am talking about 6 figure loses in just a couple of weeks.
Happy Halloween,
Ernst
So good to read you again!!!
please don't leave us again!
Posted by: Noam | November 02, 2009 at 09:29 AM