As the S&P rose 20 points and failed at the most famous 50 day moving average in recent times, the VXX continued its inevitable move lower. The VIX touched 16 at its low of the day, and moved slightly higher as the market gave back half of its early day gains. That was the second test of the 50 day from below, and the more it happens, the likelier it is to break through to the upside.
There is a significant amount of bearishness out there, as the NAAIM data recently demonstrated. 75% of active managers have backed away from equities. And the most recent survey corresponds with the lows of last June:
http://www.naaim.org/news/naaim-survey-of-manager-sentiment/
Most pundits are claiming that volatility is here to stay for what will be a choppy summer. This may be true, but I would probably be inclined to sell vol whenever the VIX is above the 19-20 level. As there have been enormous fund withdrawals in the bond space, consider where that cash is most inclined to go. Could there be a consistent bid for stocks this summer and it will be much less volatile than predicted? I’m just considering a contrarian viewpoint to the legions of folks expecting the 50 day and bearish crosses to cause a big retracement and higher volatility for the remainder of the summer.
The futures are still maintaining a significant spread to the VIX and time is quickly running out on the July contract. There are only 9.5 trading days left for the July VIX futures:
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX N3-CF | S&P 500 VOLATILITY | July2013 | 16:15:00 | 17.60 | -0.45 | 17.65 | 17.80 | 16.95 |
| VX Q3-CF | S&P 500 VOLATILITY | August2013 | 16:15:00 | 18.45 | -0.45 | 18.65 | 18.70 | 18.00 |
| VX U3-CF | S&P 500 VOLATILITY | September2013 | 16:15:00 | 19.35 | -0.50 | 19.65 | 19.65 | 18.95 |
The VXX will be nearly 50% of each contract, probably by tomorrow’s close. I do not know exactly how they handle the roll for holidays, but it doesn’t Payday Loans really matter. The August cycle can be incredibly quiet, as we witnessed last year with the VIX falling into the 13’s during August. So the spread of approximately 13% of spot VIX to August will be a headwind to VXX in a short period of time.
I closed all of my VXX July $19 puts today for a 100% return. I still hold the $18’s for .14 and I will be a tad more patient with them as the VXX can certainly fall to nearly 19 in the short-term. Yet, I reduced the vast majority of the long put risk, as the 18’s fulfilled our expectations and a sell-off could destroy their value.
Other trades executed today:
Sold July 5th SPY call spread at 163.5-165 for .34. It has already fallen to .17. If the market moves higher tomorrow, I will be looking to sell next week, as the decay in those options should occur rather early relative to it’s typical Thursday afternoon vol decay, on anticipation of the weekend.
Sold a July 5th GLD 122.5-124.5 spread for .46. It is virtually unchanged. If GLD moves higher from here, I may roll it up. GLD volatility was over 30 and fell 10% today:
I would rather sell call spreads than put spreads, simply due to market behavior. The market drifts higher and plummets lower, so the odds of getting caught holding a bad spread are higher on the put side.
Consider this idea, one that I’ve been pondering for some time. The times most market participants are on vacation, seems to be the easiest time to execute profitable trades in the marketplace. The winter holidays are a classic example, and this week is another one. I look forward to the holiday weeks. If you don’t know what time-tested advantage you have during the certain annual events, I recommend you pick up the Stock Traders Almanac.
Follow VolatilityWiz on twitter, as I post these trades shortly after they occur.
