Monday, December 29, 2014

Monday's Finalists

The two bull signals that made it past the early rounds of analysis (see "Monday's Prospects") failed in the final rounds, each on the same two counts.

Although LNG and VTI both confirmed their signals by continuing to trade beyond their 20-day price channels, they are both unsuitable for the sort of trade I'm looking for these days: Options spreads sold short for a credit.

These are very short term trades, typically lasting four weeks or less. They require both relatively high implied volatility, which I define as the 60th percentile or greater of the rise to the prior higher high, and liquid options, which I define as a front-month at-the-money bid/ask spread of under 10%.

I prefer very short-lived positions in part because the opportunity is there. We went with low volatility for long stretches during the year, with the VIX -- volatility on the S&P 500 -- below 13%. 

The VIX peaked in October at 31%, its highest point since 2011. And although it has since declined to 14%, it is relatively high for many stocks, presenting opportunities for short plays.

The other reason is uncertainty about the market's macro trend. The S&P 500 had been trending sharply upward since March 2009. That's a very long run to have without a significant downward correction. 

Couple that with the strong likelihood that the central bank will soon tighten down a bit to ensure that inflation stays in check, and my mental alarm bells are screaming that a major shift in trend is almost upon us.

Given the reality that I can't predict the timing of the downturn, only the historical certainty that it will occur, the prudent course is to stay out of long term commitments and focus on the shorter term.

Both LNG and VTI have bid/ask spreads in the double digits and relatively low implied volatility. They fail both requirements for very short term trades. Therefore, I won't be opening any new positions based on Friday's markets.

-- Tim Bovee, Portland, Oregon, Dec. 29, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.

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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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