Did You Catch This VIX Trade?
The Dynamic Wealth Report
May 5, 2010
by Justin Bennett, Editor
Three weeks ago I wrote an article on the Volatility Index (VIX). I talked about the broad markets and the current value of the
VIX. In the article I stated, “In my opinion, the current VIX
reading is way too low, relative to the outlying risks
in global markets.”
I also wrote, “A number of fundamental stories could trigger a short
term selling panic. Given the right story, the VIX could spike up to
around 30 very quickly.”
At that time, the VIX was trading just under 16 and the S&P 500 was
trading around 1210.
I also recommended an option play to take advantage of the extremely low
reading in the VIX. I said to take a look at the VIX June 2010 17
Calls. At the time, the calls were trading for around $4.80.
If you missed this free article, you can find it
here.
Now let’s be clear about something…
This wasn’t an off the cuff trade I thought of the night before. I had
been ‘stalking’ this trade for over two months.
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Week after week I was tracking it. I was constantly looking at how the
markets reacted to important news.
More specifically, I was watching for how the market reacted to news out
of Europe. For weeks on end, fundamentally negative news would
come out of Europe. But the U.S. markets completely ignored it. The
markets went higher day after day, week after week. At the same time, the
VIX kept falling.
The U.S. markets were acting as if they were completely insulated
from the problems in Europe.
Unfortunately, the problems in Europe are just too big to ignore. At
some point, the U.S. markets would have to recognize the risks.
And look what’s happening now…
The VIX has exploded in the last few days.
The complacent nature of the market has been set on its ear. Volatility
is the new game in town. The past week has brought some big moves in the
markets. The past three trading days have seen big triple digit moves.
Let’s take a look at a current chart of the VIX…
What’s causing all this volatility? You guessed it… the main issue is
the
debt problems in Europe. The simple talk of a Greece
bailout is turning into talk of Europe-wide problems. Credit markets in
other European countries are starting to behave badly.
And what about the VIX options we talked about?
The VIX June 2010 17 Calls have done nicely. As of yesterday morning,
the calls were trading around $7.60.
That’s a sweet 58% jump in just
three short weeks. If you got in on this trade, don’t be afraid to
take some profits.
But don’t sell them all… let some of them ride for more upside. The
issues in Europe aren’t going away anytime soon.
So is this article just about me tooting my horn because I was
right?
Nope. I’m trying to get across some important aspects of trading
psychology. And those aspects are
patience and discipline.
You see, sometimes great trades take a long time to setup. It’s a game
of
patience for the trader. You have to be
disciplined
to wait for the technical conditions to be just right. It’s a game of
cat and mouse if you will. But when the technical setup presents itself…
you have to pounce.
And pounce we did. Hopefully some of you are sitting on nice profits!
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• Live Cattle (Over $0.96 a pound)
Cattle prices continue to surge. June 2010 live cattle futures have
rallied 16% since the lows created in December of 2009. The rally is due
to the low number of cattle in feedlots in the U.S.
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