03 January 2007

Counting My Chickens

Those of us who like to try and trade normal wave structure (whatever that is) must be feeling as if said wave structure had been cancelled indefinately... at least as far as the stock indicies are concerned.

We've all stared disbelievingly at the SP500 for several months now so no need for me to post a chart, but just in case you've been visiting Venus or somewhere over the last months, it's gone pretty much straight up without a breather.

I like to write premium over the indicies in the form of strangles/condors and suchlike and leg into them off what I think may be swing points. More recently, because of the pathetic volatility and relentless boomage, I've tried to have a mixed gamma position in the form of put backspreads written at a credit (My thinking was to position for a correction but still profit if it just kept going up). This has worked pretty well, if not unspectacularly, but at some stage I want to get back to short gamma again...

...and I've done that this expiry. So far the momentum in the SP looks to be slowly abating and looking a tad toppy, to me at least. This first trading day had me thinking I'd have to defend the short calls... then.... a selloff! OMG!

Could this be the start of a long overdue correction? (in the normal wave structure style?). The Dow is still green as I'm typing this but the other indicies are red after being up quite strongly.

I might be counting my chickens, but I think the top is in for this expiry. It will make a nice start for this year if this short gamma position goes out with a whimper.

My $0.02


Anonymous said...

Which indices do you favour for index options?

Given the low IV in recent months, would you recommend credit spreads on index? Thanks


W. Anthony Lawrence said...


I'll do SP500, Naz or Russell 2000, depending on which looks to offer the best risk reward.

Re low IV: well yes it has been low, but realized vol has been even lower. I wouldn't "recommend" anything as I'm not qualified to do so, but credit spreads are certainly a possibility if it fits your view of the market.

Of course the "best" trade is the one you see in hindsite. I try to make a scenario and construct a strategy that fits. Sometimes I'm a genius, sometimes a mug.I only advocate being fully AWARE of what it is you're trading.