When I restarted the Portfolio Performance page due to recently opening up a new fund in HK, I said that I will mainly update the blog about funds movement and performance and not focus on trades anymore. Keeping that in mind, every once in awhile I will also update the blog on a few trades I take too, but I will not bother keeping the performance score on these (it takes too much time). So lets get into it...
I have recently purchased some OTM (out of the money) Puts on the S&P 500. Just a quick note, these trades have nothing to do with the fund, but my own personal trading account. Why did I buy some Puts on the US equity market? First of all, my view since a week or two ago has been that the equity markets are now overdue for a correction or a consolidation (Article: Possibility Of A Correction Approaching - Part I). In that article I also showed that Call buying by the Dumb Money has been quite high. Majority of the time, you are always better off doing the opposite when you see a huge Call binge.
Fast forward to today and now we have even more Calls being bought by dumb money, while at the same time smart money is running into Puts to protect their gains since October 04th bottom on the S&P 500 at 1075. As we can see from the chart above, the options activity is leaning towards a correction and while optimism is not as extreme as it could get over a 21 day reading (one trading month), it is definitely becoming so over a 5 day or 10 day average.
On top of that, the Volatility Index has now broken down below 20, making OTM Puts much cheaper than in November or December of last year. Therefore, a risk to reward is pretty decent on a trade like this, where it wasn't so only a couple of months ago. Furthermore, the VIX has now broken down below 2 standard deviations of 20 days, which tends to signal an oversold condition for the index and a potential pop. The options I own will not expire for the next few weeks, so I got plenty of time to wait for a pullback. I guess we will see soon enough...
US Dollar down and US Stock Market down-a change in market behavior and pattern in the cards here?
ReplyDeleteUS Dollar down and US Stock Market down-a change in market behavior and pattern in the cards here?
ReplyDeleteIts possible as they have been rising together too. I look at every asset class on its own and focus less on correlations, which come in or out of play.
ReplyDeleteoh yes-I remember from previous days when they went opposite.
ReplyDeleteGo to www.traderplanet.com/library/intermarket and use their Intermarket Analysis Tool. I've used it and it's really nice. It will calculate correlations for any two futures contracts, stocks, or combination over whatever date range you want.
ReplyDeleteDoes anyone take a look at BDI recently (glut, ok...), especially on the Pacific side ?... China soft-landing everyone?
ReplyDeleteFred
BDI - Article in NY Times: http://tinyurl.com/7d7z33y
ReplyDeleteI think despite Baltic Dry Index's hard falls, if one was to look at a long term chart, we are just range bound at the bottom due to a large over supply.
ReplyDeleteOn a topic of Equities, since Bernanke spoke during the week, I noticed a lot of bears who were short the equity market - covered in last 24 hours. Reading a lot of blogs around the web it seems to be a common theme. Usually when bears give up and turn neutral or bullish, that is when prices correct hehe!
Tiho,
ReplyDeleteI know you see your silver long in the portfolio as long term and you aren't worried about short term noise. However, if you are correct about the markets going down with your S&P put - what do you think that does to the price of silver?
Taking it further, if there was a Greek default do you think that would result in a blow off and take silver down, at least temporarily?
I presume that then leads to more money printing so even if silver had dropped it then recovers and goes even higher?
Anonymous - your question is quite a good one and to be honest with you I can pretend I know the answer, like so many other bloggers, but I do not.
ReplyDeleteHaving said that, it is my opinion that Silver bottomed properly in late December, so any correction in Silver should be just a pullback in the uptrend. As a matter of fact, I feel the same way about equities too.
Therefore, one could say my bundle of Puts on the S&P 500 is just a hedge, you understand? I'm actually not too bearish at all, but I do expect a correction, because nothing including Silver, S&P 500 or CRB Index go up in a straight line.
Tiho,
ReplyDeleteYes, BDI is back to the bottom range. But I am more concern by the term structure of the rates of Capemax/Panamax on Atlantic/Pacific roads. Pacific ones look very weak in near future.
http://www.dryships.com/pages/report.asp
Fred