A little more than a month ago, we highlighted the fairly simple inverse relationship btwn the SPX and the VIX (below) and how we saw things setting up in a not too different manner than 2011 and that the gap btwn the VIX and the SPX could be very close to narrowing.
When you look at the chart of the VIX overlaid against the SPX from April 15th, you can see in hindsight that there was a great deal of complacency with the VIX in the high teens and the SPX close to the 52week highs, given the backdrop of a whole host of potential speed bumps facing the markets.
VIX vs SPX April15th 2012:
What I found most interesting about this chart was how and when the 2 indices crossed paths in 2011, and then how much time the 2 indices spent jumbled together in the throws of last year’s European sovereign debt crises in the fall.
Now when I look at the way these 2 indices have begun to converge over the last 5 weeks, it seems fairly obvious to me that we are likely to see a re-test of 1250 in the SPX and a breach of 30 on the VIX. Now at this point that is not such a bold call, but when you consider that this chart has served as a valuable input to our trading over the last month and a half, and when you consider the symmetry of the pattern, I think it is safe to assume that we could be nearing a spike in volatility.
VIX vs SPX May 23rd 2012:
So again, nothing scientific here at all, and some of you may call it a bit pedestrian, but the chart got us thinking that relative to some qualitative inputs we were considering back in April, this chart just looked a bit out of whack.
Obviously this thing goes the other way quickly with a calming of the situation in Greece, which could crescendo into the June 17th elections, but if the news flow both here and abroad stays as bad as it has been, both macro and on the earnings front, we will see a “crossing of the streams”.
“You said crossing the streams was bad!”
Original Post from April 15th, 2012: Trading Diary Apr 9th – Apr13th
Last week the SPX closed down about 2% on the 5 day session, the worst week of 2012, so far, while the VIX is in the midst of it’s largest rally off of a low of the year, this one equalling more than 40% off of the March 16th intra-day low of 13 and change. The chart below of the VIX vs the SPX over the last year doesn’t say everything you need to know about their general inverse relationship, but it does suggest that if we are too get any additional fireworks in Europe in the weeks to come, or some other unforeseen negative event, there would be a strong likelihood that the 2 lines would be drawn together like a fat kid to candy.
There is nothing scientific in this suggestion, but when I start to annotate charts with lines and circles I get pretty geeked up and this one feels like we are going to get a break of support (or at least a re-test) in the SPX at 1350, (possibly even as low as 1315), while 25 in the VIX in the coming weeks seems like a foregone conclusion, especially if Q1 earnings and/or Q2 guidance disappoint.
Last week I came in relatively geared to the short side, and even-though most of my short biased positions were starting to act the way they were intended, I wasn’t by any means doing a victory lap. I know I have been calling for a sell off since, well mid January, but believe it or not most of my shorts (excluding AAPL of course) have been working out ok since mid-March. This has given me a bit more confidence to hold onto some as it became fairly clear in the last days of March that the rally had become fairly narrow.
On Tuesday, in the throws of the worst trading session of the year, I updated a bunch of my short biased trades (here), taking some profits in a couple where I had doubles or very near doubles of the original premium outlay. Other than taking half off in my MSFT Apr 31/29 Put Spread, XLF Apt 15 Puts, and KO May 72.50/70 Put Spread I basically sat on my hands with existing positions (see post above). The only position that I am slightly bothered by is CRM May 145/130/115 Put Fly. The stock is up 4.5% since putting this on March 28th, and actually closed at a new 52 week high on Friday in the midst of the worst trading day of the year. On the next move lower in this stock I may take this one off as the stock trades as if AAPL is going to buy it (that is not a rumor, nor am i suggesting it, I was gonna use the G word but didn’t want to annoy the faithful)
As for New Positions, I put on whatI thought were a few smart trades and one dumb one, dumb because I basically new it was when I wrote up the idea, stated as such and still did it.
On Monday Apr 9th, I added to my RIMM long shot take out bet after seeing the enthusiasm of the MSFT/AOL patent deal. I actually rolled the short strike down a bit and Now I am long the Jan 20/25 and the 20/27.5 call spreads. I like the risk /reward of the 20/25 as it has a 10 to 1 payout if the stock is above the short strike on Jan expiration. This position is obviously a long shot and I don’t have a lot of premium dedicated to the notion that they will get bought, more for shits and giggles as I am not really that fired up to press the short for the death rattle trade. Again this is not a fundamental call on the turnaround of their business, just a lotto ticket.
On Tuesday April 10th, I put on a bit of cute trade in front of JPM‘s Q1 earnings to be reported on April 13th. I sold the April weekly 42 Puts and used the premium to Buy the April regular 42 Puts. I thought that the weeklies were just to expensive and wanted to own the slightly cheaper April regulars for any follow through into this coming weeks slew of bank earnings. This trade worked out well as the stock on Friday post earnings closed down 3.6%, but above $42, leaving the weeklies expiring worthless and now I won the April 42 Puts heading into what could be a rocky week for the bank sector. I bought the calendar for .20, the April 42 puts are now worth .30, if the stock opens lower after Citi’s earnings on Monday morning, I will look to sell the Apr 41 puts for .20 or more and then have the Apr 42/41 Put Spread on for Free, stay tuned for updates tomor.
On Wednesday April 11th, I took a hard look at GOOG‘s earnings and decided while I did not have a strong opinion on the direction of the stock post results I wanted to take advantage of the vol disparity btwn the April weeklies and the much cheaper Mays. I bought a Apr13th weekly/ May 675 call calendar for 6.00. With the stock closing down 4% on Friday, the Apr weekly calls expired worthless and the May 675 calls are worth about 3.80, or a 2.2o loss on the position, if the stock can hold tomorrow and looks like it could move back above 650 (the pre-earning levels) I may look to turn into a call spread.
On Thursday April 12th’s rally I was a bit quiet and just sat on my hands until late in the day when JBHT‘s earnings report caught my eye. This trade idea had pre-apologies written all over it, even in the title of the post, so if you guys recognize a pattern when i put in a post that this is a LOW CONVICTION idea, it is probably not smart to try to replicate this sort of trade. But when I am bored and annoyed I do some dumb things. I bought some puts in April outright as I thought it would take a beat and raise to get this stock going higher with input costs where they are….well the stock closed up on the day, albeit modestly, and the puts I own lost more than half their value…..but the good thing is I have 5 days to get even and the stock would only need one bad day to make that happen and I think we will get it.
On Friday in the throws of a nasty sell off, I did something that I don’t normally do and press a couple of the worst acting stocks in the market, Citi and MS. Citi was more of an earnings play as the company is widely expected to have the worst results of the group and I bought a relatively near the money $1 wide put spread with a small premium outlay to play for a quick puke in the name. What I like about this trade is that i have defined my risk and even if Citi pops a little after last week’s weakness I have 5 trading days to try and get this small amount of premium back in a name that will be on the hitlist of many investors if we get broad based sell off for any number of reasons this week.
The other bank trade that is a bit more of an extreme press was in MS where I looked a bit longer dated to May and bought a $2 wide Put Fly for what I think could be the first large U.S. bank stock to roundtrip this year’s performance. What I love about this fly is that I am only risking .23 in premium for what some may feel is a long shot in only 5 weeks, but the way I see it if the world is gonna come undone in the next few weeks the banks will be hit first and MS will be the first one on the block. If this were to occur, this trade structure risks .23 btwn $16 and $12 and offers a 1.77 max potential payout, but is profitable btwn 15.77 and 12.23. As Han Solo said to C3-P0 in The Empire Strikes Back, “Don’t tell me the odds”.
So there you have it, I laughed, I cried this week but generally the highlight was meeting Bob Weir of the Grateful Dead on the set of Fast Money on Wednesday, and then getting to see him play Saturday night at the Beacon Theater. For those who missed it, pic below and a couple clips from my iPhone from the show.
ALSO CHECK OUT OUR POST ON IMPLIED MOVE CALCULATIONS, I think this should be helpful to most as we head into a heavy earnings period this week and next.
Ok I’ll Stop bragging about it.