Tag Archives | VIX futures

The Rising Stock Market

I've discovered how difficult it is to maintain a blog when driving around the country.  It's much easier when I'm comfortably ensconced in my home office.

Enjoyed the car trip to North Carolina, but happy to be home.


Strategy of choice

Trading iron condors was especially successful as recently as a few months ago when the markets calmly traded within a range.  More recently, a rising market has made this strategy less effective.  This is as it should be.  No single strategy works all the time and a trader must have more than one strategy in his/her trade arsenal.

While iron condor traders (along with sellers of call credit spreads) may be having a difficult time, covered call writers, sellers of naked puts and put credit spreads should be enjoying the rising market.

One of the personality traits that makes for a successful trader is understanding that varying market conditions require different appproaches.  The bottom line is understanding that stubbornness is not the trait of a winning trader.

The future

The problem is that we trade for the future, and for most traders, the future is unknowable. [I do understand that technical analysts claim the ability to forsee the future of the stock market – often enough to wager on their expectations]

For example:  I don't know why the market is advancing so strongly.  Perhaps solid earnings gains – when compared with last year – are all that matters.  Perhaps the banks will eventually lend money and businesses will once again hire workers.

From my perspective, all I see is the gloom of high unemployment, coupled with companies being satisfied with higher productivity, and thus, no plans to hire. Maybe yesterday's election will have some positive or negative influence on the market.  What I know is that I don't know.

I see falling housing prices.  I'm concerned about the inevitable class-action lawsuits over home foreclosures that were not processed according to law. 

I see money being concentrated into the hands of fewer and fewer people and don't know how the consumer can spend money to support the economy, even if he/she wants to do so.  This is not a political statement.  It's merely me, wondering who is going to provide revenue to all these companies whose stock prices continue to rise.


However the market has been rising and I am not going to fight it.   That translates into not opening new iron condor positions blindly.  I may not  understand the rally, but I also know that it's foolish to fight market trends.  Th whole idea behind market neutral trading is to avoid trading with a bias.

I've learned that 'the market' is much smarter than I am.  I'm doing what I can to stay ahead of the market rise, adjusting sooner than usual, and refusing to open bearish positions. I also kept cash in reserve if adjustments were necessary.  And they have become necessary for my specific positions. For now that's my plan.

It's not necessary to aggressively seek profits when the market is telling you that your preferred approach (strategy) is not working.  I can wait patiently, holding less aggressive positions.  That translates into reduced profit expectations with less risk than my 'normal' portfolio.  This is just one more aspect of successful risk management.


The Obvious?

I don't want to wager on this thought, but it occurs to me that if I am refusing to consider taking bearish plays (when I am bearish) and was seriously considering (for a short time) taking bullish positions to profit from a further rally, then perhaps that's a sign of capitulation.  In other words, if this non-believer in the current bull market wants to get long, then maybe it's a signal that others may be capitulating.

In other words: I should go short for the sole reason that I don't want to go short.  That's not viable in my world.  Is it in yours?

A note on the ad below (not visible to RSS subscribers): Several ads appear on a rotating basis and I never know which one is visible.



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Opinion: New option strategy needed?

It's after Labor Day and for many people (in the Northern Hemisphere) summer is over.  Many times, that means the summer doldrums are behind us and September, traditionally the worst-performing month, and October, the scariest month – lie ahead.

There is so much bad news in the air, that it amazes me that anyone is making bullish market predictions.  There are too many bears out there, and I'm not going to wager on direction.  Nevertheless, the bulls, and especially the bears are noisy. For the past several months, VIX futures have been predicting more volatile times are coming, and soon. 

Should we take any action based on the above, or conduct business as usual?  Do we continue to use our favorite methods, or is this the time to minimize negative gamma?  Or do we take a different path and pay to own positive gamma?

As regular readers know, I'm a premium-selling (always with limited risk and never naked short any options) iron condor trader.  At least most of the time.

I usually ignore anyone's prediction of future stock market activity, and go about my business.  That includes paying careful attention to sizing trades correctly (good money management) and keeping portfolio risk at acceptable levels (good risk management).

I see no reason to abandon that philosophy now.  However, every once in awhile complacency sets in and it's easy to broaden the limits of one's comfort zone – just by getting lazy.  The point of this post is to be certain everyone is aware that overconfidence is a portfolio killer.  If you have been doing well by trading iron condors over the past several months, please be alert to the possibility that the markets may stop being so kind. 

Yes, I know there have been big up and down movements, but they have not been sustainable in recent times and the market has traded within a range.  If your iron condors were chosen with strikes that never became threatened, and you collected your time decay day after day, you are on a nice winning streak, and it's time for a big decision.

Scenario I

We get so few periods in which iron condors do well month after month, that we must milk them for the increased profitability as long as it lasts.  That means sizing trades near the maximum that your comfort zone allows.  It means holding trades a bit longer (NOT to expiration) and collecting a few extra nickels of profit when exiting the trade.  [It does not mean going nuts and taking outlandish risk – but I assume you already know that.]

If the market has been 'behaving' then we should continue to go for small extra gains because the opportunity to do that is likely to disappear at any time. But even one additional month of increased profitability is worth seeking.

Scenario II

Say 'thank you' for the good times and prepare for more volatile markets.  That may suggest owning insurance for your positions or merely saving more cash.  Cash can be used to make adjustments or for opportunities that appear after market volatility increases. 

The choice: prepare for dangerous September and October by playing it safer – or not.

It's really a choice, but I make it a point of recognizing that I cannot predict the future.  Others may see increased volatility ahead, but I don't have any opinion (that I care to back with cash) on that coming true.  Thus, I'm choosing business as usual.  However, I will not be extra aggressive.  I'll respect the possibility that VIX futures traders have a good reason for bidding those futures to high levels.  But, I will not be afraid either.  I want to make the attempt to take advantage of what has been for me, an ideal iron condor environment (for only 3+ months).

What about you?  Heading into Sep/Oct with guns blazing, or are you prepared for a full retreat?



The September 2010 issue of Expiring Monthly will be published in two weeks (Sep 20, 2010).  The major theme of this issue is 'directional trading – a discussion.'

Most traders have a directional bias and act on it.  Others don't.  This months issue tackles the topic from different vantage points.

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