What a week it was for the major averages. The meteoric rise would almost have to find perma-bears and “top callers” in dismay had they not left long positions in play until the markets showed actual signs of resistance and subsequent declines. The Dow Jones Industrial Average climbed 4.4% and the S&P 500 has rallied 4.2% through Friday for their best start to a year since the first nine days of 2003. The Nasdaq jumped 5.2%, the best since 2004, according to the Dow Jones Data Group.
At Finom Group, we couldn’t propose to forecast when or at what levels the market WILL pullback, but eventually it WILL. When we take a peak at history, we are forced to recognize that the S&P 500 is the most overbought in 38 years based on the relative strength index (RSI). This metric in and of itself does not dictate the future of markets, but it does indicate just how strong the market is and has been over the last several months.
One thing we will offer, subjectively speaking, is that generally when markets trend in one-direction, for so long, with such strength, when the bough breaks it tends to catch many traders/investors off guard. A catalyst generally needs to be presented for the markets to halt the current trend. I’m sure we could list a great many catalysts here and for that very reason, what’s the point? Until it is presented, fear mongering may prove as wasteful as it has throughout 2017. The best position to be in and as markets have trended higher is to simply expect the unexpected while appreciating the market at-hand. Additionally, be prepared to protect profits should markets and major averages express consecutive days of negative 1% moves or greater. The fundamental backdrop of the market is likely going to remain strong through 2018 and barring any significant anomaly.
Oddly enough, some might think that with this market exuberance complacency in the markets or fear should be at record levels. But when reviewing the VIX last week we are forced to accept that it’s one thing to continue to buy equities, it’s a whole other activity of buying and protecting those long holdings. Wednesday of last week proved to be the 2nd busiest day on record in the VIX option arena. When witnessing the activity, we reached out to Russell Rhoads of the CBOE in hopes he would follow up on some interesting activity in the VIX options.
Naturally, urging Russell to follow up on what we were seeing in this one particular trade proved worthwhile as he reports below on the trade. Russell denotes in his weekly dispatch to readers and traders of the VIX the following identified trade that has been ongoing since July of 2017.
This past Wednesday VIX Jan 12 Puts were purchased for 1.53, the VIX Jan 15 Call sold for 0.12 and finally the two VIX Jan 25 calls purchased for 0.04 with a cost of 1.49 to exit the January portion of the trade. The trade relies on exposure to February contracts, which actually expire on Valentine’s Day. The VIX Feb 12 Puts were sold for 1.38, the VIX Feb 15 Calls were purchased for 0.73 and two VIX Feb 25 Calls were sold for 0.27 each. This portion of the trade would have generated a credit of 1.19 and a cost of 0.30 per spread for this roll. The running cost for the total trade is 0.50 and a payout at February expiration.
Like most of these trades, they are looking for an overdue spike in volatility and prove enough to offset the typical decay in VIX-ETPs and the VIX that usually coincides with vast equity market rallies. It’s unusual with only a few days until expiration, but obviously long portfolio hedging with cheap volatility structures has been the play. Great work Russell, great work!
At Finom Group, we just continue to look for trading opportunities. To date, most of our trades put to work have been met with swift profits. We positioned longer-term investments that are also yielding double-digit returns already in the form of J.C. Penney (JCP) and Anadarko Petroleum (APC). For the most part, Finom Group is dedicated to trading the volatility complex and led by Seth Golden, one of the more experienced and successful volatility traders.
Outside of the volatility complex, Seth has been trading the ranges in such corporates like Apple Inc. and Twitter, as depicted in the Finom Group Trade Alerts table above. Now on to this coming week’s economic data. This week is a holiday shortened trading week. On Tuesday when trading resumes it will do so with a relatively light economic data calendar. What most traders will be eyeing this coming week is likely the Fed’s Beige Book that will be released on Wednesday afternoon.
For the full report and Trade Alert access, join us at finomgroup.com To share your thoughts, analysis on the markets and individual corporate names while engaging other investors/traders choose our contributor membership and chat with our founders directly!
Tags: UVXY VIX
