Thursday, November 12, 2009

12/11: Market flips off the risk trade, but for how long?

Various asset classes moved in textbook-correlated fashion during today's exciting trade -- with the textbook being market performance of recent memory. The S&P500 declined a percent -- 11 points -- to 1087, after an intra-day high and low, respectively, of 1102 and 1085. In impressively correlated lockstep, the dollar advanced (the EUR/USD trade dipped from above 1.50 to about 1.484) and oil sunk (the front-month WTI contract closed under $77 per barrel). All these moves signal risk aversion: a drop in equities indicates risk aversion for obvious reasons; a rise in the dollar suggests weaning risk appetite as the greenback is a safe-haven currency and, furthermore, its appreciation curtails the carry trade, whereby a low-yielding asset like the USD is sold to fund the purchase of a high-yielding asset (the Australian dollar -- AUD -- is a recent favourite); and a decline in commodities prices, such as oil, points towards a risk-off sentiment among traders as an increasingly bearish appraisal of worldwide growth (and especially Chinese growth) would naturally entail decreased demand and lower prices for commodities. The usual ten-day chart of the S&P500 follows, courtesy of

In brief, my own trade today was auspicious, though it could have used more luck still. I exited the Vix Nov 22.5 calls which I had entered on Monday, as I found myself increasingly spooked to be holding a November-expiry option (which I shouldn't have entered at such a late stage). Lucky for me, the market was unexpectedly holding up the expected volatility on these options -- and hence their time value, too. I was able to sell at a decent profit.

Yet my timing was unlucky. I sold early in the 13:00 (CST) hour, as the markets seemed poised to gain ground (which would have caused my Vix calls to undoubtedly depreciate). But it was only a head-fake. Immediately after the sale, I left for an invigorating run at my gym and, upon returning, found the markets down a further three-quarters of a percent. But I'm not bothered by having left money on the table; trading is a profession of managing probabilities, and I acted in accordance with my best analysis. To end the day, finally, I entered a position in COF December-expiry puts, essentially placing a bet that markets will continue their decline into tomorrow's session. I chose COF (Capital One) as it pierced through a significant support level -- $38.75 -- just prior to today's close, which makes further declines more likely. I see support around $36.00. As for the S&P500, a decline to at least 1080 certainly seems plausible, which would in all likelihood afford me a profitable exit opportunity from the COF puts. A 10-day of COF follows:

Happy hunting! Give it 480 percent, your bestest! (Yes, the latter is a tribute to the one and only Martin Lukes of a-b global, suddenly resurrected in the pink pages. What joy!)

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