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Trading Update January 10, 2018

In what proved to be a very short lived pullback Monday morning, futures gave back a few points only to rally back to new all time highs. Markets plowed higher again Tuesday and then gave back about 3/4 of Tuesday's gains in the last hour of trading. This is all very normal, constructive trading so far. After being up 5 days in a row, I would expect the market to finally pause here at some point.

Realistically, we have been in an extreme one-way market the last week.

Tuesday, VIX finally had a close above 10. It might seem like quite a pop from the recent near-record lows but let's not forget too quickly that a VIX of 10.08 is still extremely bullish for the market overall. On top of that, the 9.3% Contango in VIX Futures is so steep that SVXY is naturally experiencing a push higher of $0.82 a day and UVXY is being driven lower by $0.11 a day. That means even if VIX doesn't move much for the next week and stays in the low 10 range, SVXY would end up closing $3.28 higher by next Wednesday and UVXY would be $0.44 lower, assuming the futures premium stays the same.

With overall market internals still healthy and the market finally looking like it wants a little pullback or at least a rest, today's late day VIX pop should probably be shorted yet again. I reopened a core volatility short and now hold SVXY in 10% of my portfolio. Is it possible volatility continues to climb from here? Of course. In that event I may have to decide whether the risk of holding SVXY is still worth it. But with a small entry position here, I also have room to add to it before having to jump ship in case things really move against me.

I've also been having some success lately with SPX puts, which seems like a weird thing to say near all time highs. My timing has been best in morning trading fading the gaps. It's a nice hedge against some of my long positions and the sell to close usually coincides with a good daytrade entry on a short volatility trade. It can be a challenge to get good pricing on these though, so they only make up a small portion of my trading capital, and I've been very shy about getting too bearish on the market overall. I actually feel I am underweight now on equities so I'll be taking any pullback I can get to add back to my positions. 

Plan for tomorrow: sit back and watch VXST:VIX ratio and overall market action. A pullback to some prior high volume nodes on SP Futures seems likely to retest some prior levels. I'm eyeing the 2724 range. If we get a bounce there, it seems like a great place to add more SVXY, as long as VXST is still significantly below VIX. I'll also reenter some TQQQ that I sold too soon last week. Banks look great with no signs of slowing down so if we do get a small pullback there, FAS looks like a good one to add to my portfolio.

Finally, I am wary of being short volatility into a three day weekend again. If SVXY bounces back the next few days and VIX returns to 9-9.5 range, I'll probably collect my profits and reenter after the weekend. If VIX stays slightly elevated or even rises closer to 11, it can be a perfect recipe for a VIX smash once the weekend has passed assuming no adverse news hits the markets.

Happy VIX Trading!

Comments

  1. UnknownJanuary 11, 2018 at 12:13 AM

    Thanks for the update, always very interesting to hear your thoughts.

    ReplyDelete

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