Special Volatility Alert!
We have received a number of comments and questions about the recent record low volatility and how that effects our releases. I think the first thing that we do is to explain how “air in the balloon” is calculated and then explain how that effects our trading decisions.
Vega is the amount of premium in the serial model. It is calculated as buyers and sellers agree on a price for the options. The most important price point is the at the money (ATM) straddle and the reason for this is that the price of the options is all Vega (air). It is the only strike that has no intrinsic value. All the other strikes are then priced off the ATM. The more uncertainty in the market, the higher the value of the ATM. The price of the underlying equity does not have to move for the straddle to go up or down in price.
For many retail investors it takes them a while to pick up on this concept and they are confused as how the price of the options they purchased continue to move up or down without a price change in the underlying stock. That concept is dealt with in my book on options pricing which is located on the Optionomics website. One of the most widely used gauges of volatility is the Vix Index which measures the overall volatility in the market in general.
Currently, the Vix is at or near ten-year lows which translates into the trader’s view that there is very little exposure to sudden price moves in the stocks. Most of Optionomics trades are based on volatility and as the air continues to come out of the balloon it makes it harder for us to find tradeable positions. Remember our strategy is to operate like a casino and scalp small profits with limited risk that turn into nice profits over a long period of time.
As the air goes down it makes it harder for us to find tradable opportunities. Market Edge picks the stocks and Optionomics picks the type of trade and the spreads. These two items need to be in sync in order for us to make trades. We have proven over two years that Market Edge and the Optionomics strategies give us a winning edge and we want to keep that going!
So, since during periods of extremely low volatility, it becomes harder and harder to find a lot of trades that fit our criteria. We are not going to make trades just to make trades. The extreme low volatility will gradually go back to its ten-year mean and when that occurs, our trading will pick up. Patience is one of the traits needed to be a good trader and now is the time to use that approach.
Muller Will Never Be A Talk Show Host!
What was that? The most anticipated congressional testimony since the McCarthy hearings sixty-five years ago turned into the biggest farce that I have ever seen. The word on Muller was that he was taciturn and was never going to be confused with a comedian, but his testimony was embarrassing to himself and the Democrats that insisted the truth be told by the man that authorized the report that would get Mr. Trump impeached.
Did you listen to this guy? How did he ever become the head of the FBI. He needs a personality transplant. I can’t even imagine the joy his wife (partner) has when he gets home from a day on the job. I guess no matter what they ask him he answers, “that is outside my purview”. Truthfully I didn’t even know the definition of purview until I looked it up and it means “ outside my scope of authority”.
His testimony made no sense. It seems like he authorized the report but relied on this staff to do the research and write the report for him. Many times, the inquisitors (not to be confused with questioners) had to tell him what part of the report they were referring to. When they asked him to comment or read the section out loud, he simply said that is outside my purview or no. So, what the democrats saw as a layup turned into a disaster.
Not only did his testimony guarantee that there will be no impeachment it almost guaranteed that if the Democrats won’t admit they lost the 2016 election, they have no chance to win in 2020. A few far left wingers somehow saw the testimony as a positive and said that it just opened up another chance to start new investigations. They are dreaming. By the time they open up a “witch hunt” and this time that is what it is, the 2020 election will have come and gone. It is time for them to concentrate on real issues that need to be addressed and stop living in La La land!
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
Question: Do horizontal spreads present unlimited risk?
Answer: Horizontal spreads can have unlimited risk if they are put on with a short ratio. But vertical spreads would have the same risk if they were put on as a short ratio. It is the same with straddles and strangles and the writing of naked puts and calls. They all present unlimited risk if you do not buy an equal or greater number of long options. If you buy a horizontal with a debit your risk is limited to the amount of the debit. If you put it on as a credit your risk is limited to the credit minus the strikes involved. So, remember as long as the horizontal spread does not have naked options, your risk is limited.
The Wise Guy Report: The View From The Floor
Each week I talk about what I think the Wise Guys (floor traders) are up to with the Big Three commodity contracts: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). I also track the Market Edge (www.marketedge.com) ‘Market Posture’ which has a twenty-six year record of forecasting the intermediate-term direction of the stock market as measure by the DJIA with around 70% accuracy.
T-Notes
It was another week of congestion as the market digested the news from around the world. The Muller report did not move the needle one inch. It now looks like the cut will be .25 basis points. We should expect some price action after the Fed meets and they decide the next direction that the market will take.
Crude Oil
The market had a dull week and closed virtually unchanged. Even with the problems with Iran and Britain, no one seems to care. It looks like it will take some catastrophic event to get this market to move in one direction on another. Near term support held and unless it is violated I will continue to trade this market from the long side.
Gold
Continues in a volatile congestion phase at the top of the current market. It traded down the whole week but has not violated near term support. This is a volatile congestion area that will find a breakout in a large range. I am looking to see the breakout occur before I am going to initiate a new position.
| The Big Three Commodities Contracts
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| The Market Edge – ‘Market Posture’
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The Market Edge ‘Market Posture’, which has been Bullish since the week ending 04/18/2019 (DJIA 26559.54) remains Bullish at this time.
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The option Trades and Strategies offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited and our strategies produce winning trades in three out of four possible outcomes. Check out The Scoreboard on the home page to see our results.
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Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. I also have a webinar on Thursday afternoon where I discuss various option strategies, what is happening on the trading floors and answer any questions that you may have. Don’t worry if you miss the show. They are archived on the site. Sound Good? Good! You can subscribe to either the Traders or the Investor plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do –
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Mr. Seifert