One of the most successful investment strategies practiced by hedge funds (and other sophisticated investors) in the last ten years has been the “volatility short” trade. It is rarely mentioned on TV or in the media, but that is not too surprising. They would rather promote things such as the “Japan carry trade,” which wasn’t necessarily a profitable strategy at all unless a great deal of risk was taken.
Both bulls and bears are frustrated by recent action. Most recently, $SPX has made repeated attempts to challenge the all-time highs, but it has not yet been able to break out. There is resistance in the 2110- 2120 area that has contained all advances.
In any case, the $SPX chart is still neutral until it breaks out of the triangle in a convincing way.
We are pleased to announce the release of Option Workbench 4.1. This release contains some exciting new data that will help you to create more flexible filters. Using the new volume and Put/Call Ratio fields in the Option Profiles will assist you in finding even better trading opportunities.
Other new features include:
There was some positive action this week, but in the end it's still a trading range market. $SPX moved to the high end of the range almost challenging the all-time highs, but it could not break out on the upside. There has been some improvement in the status of the other indicators, but unless $SPX can break out to the upside, it will not really matter.
Equity-only put-call ratios remain on buy signals, as their 21-day moving averages continue to drop nearly every day.
These are two Exchange Traded Notes (ETN’s) that attempt to hedge a long “stock market” portfolio by using a long volatility component. We have written about VQT before (Volume 21, No. 4), and I often talk about it in my seminars and webinars that discuss volatility trading.
The feature article is brief this time, but it is pertinent in that a potential buy signal has just set up in the Total put-call ratio – or has it? It doesn’t completely fit the parameters that we have laid out for such buy signals, but perhaps “close enough” is sufficient. The article discusses whether it is or not.
We have very well-defined criteria for determining a major Total put-call ratio buy signal. These are powerful signals, worth a 100-point rise or more in $SPX. There have been twenty such signals since the year 2000, of which 11 have produced the desired 100-point gain, and three others produced smaller gains. The total $SPX points gained from the twenty signals is +960. So, these signals are not to be taken lightly.
The stock market has traded in an ever-narrowing range for over a month now. The most recent range has been bounded by 2090 on the upside and 2050 on the downside. But now $SPX is trying to break through 2090. Even if that is accomplished, there is still considerable overhead resistance at 2110-2120 (the all-time highs).
Most of the other indicators have taken on a more positive slant in the last week or so. As a prime example, the equity-only put-call ratios have turned bullish.
$SPX couldn't develop any momentum this week. Perhaps -- as the media were saying -- stocks were just waiting for the jobs report this morning. It was a very poor jobs report, and S&P futures are down 20 points. If $SPX does indeed open 20 points lower on Monday morning, that will be a violation of the 2040 support area. With that support level broken, $SPX prices are likely to test the lower support near 2000 or slightly lower.
We have taken a new (or have returned to an old) approach for earnings-related straddle buying recently, and that is the subject of the feature article. The article also summarizes other approaches to the strategy. On page 3 is this week’s recommendation – in KMX.