The combination of VIX dropping dramatically AND NYSE New Highs reaching 260 creates a 90%+ chances that the market will grind sideways with dips under current prices in the next 1-2 months.
I left the VIX on the chart without comment, but in a previous chart I showed how 75% drops after VIX spikes create a level of demand that gets tested by the market. If that level doesn't hold, then watch out below. The "watch out below" scenario unfolded in October when the August 75% retracement of VIX level didn't hold.
If you are long the market, the signal that the market is giving you is to sell "at the money" calls and collect low levels of premium, because the odds are high that you'll keep it all. When VIX is high, writing calls is risky because although you receive a high premium, odds are high that you'll have your stock called away.
In summary, when VIX is "low", it's time to "Go". Therefore, sell "at the money" calls. When VIX is high, it's time to BUY. Therefore, don't sell calls at all. Hold on for a rally, then sell calls after the rally when VIX is low.
Cheers.
Tim Saturday, November 1, 2014 2:07PM EST
(If you need help understanding listed options - ask questions and we will direct you to online resources)
Comments
K155MY4R53
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Cheers, Tim.
BizkitBR
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U DA MAN!!!
timwest
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Thanks BizkitBR
G007
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Tim , thanks a lot for your professional analysis.... it is has really added value for everybody. G.
timwest
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This has panned out well - had you followed this strategy as outlined -
charttrader
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Thank you Tim!!
mike.lawler.969
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As an ex options market maker, I feel your analysis is incorrect in regards to vix, or volatility. You wrote " writing calls is risky because although you receive a high premium, odds are high that you'll have your stock called away. ". This makes no sense
Volatility is high because the market is falling. If you sell vol against your long stock, and the market falls, the calls will expire worthless. If you sell calls and the market rises, the drop in volatility is so great, that the calls will barely rise in value as the underlying rises.....giving you ample time to buy back or roll.
I would suggest if Vol is high, and the market is going to bounce....get long and sell the call for insurance ( Because you could be wrong). When the market bounces, the calls will barely move in value as implied vol is sucked out, if the market rallies, then just roll to a higher strike higher
Of course you would make more by just being long stock for a rally..,...since your long 100 deltas...where if you sold an overprice out of the money call, you would probably be only net 70 deltas long.....but then you have no insurance and more risk...so of course you should make more
timwest
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Thanks Mike. If you read it again and look at the logic that I'm explaining, you'll get it. I'm referring to longer term holding periods than what a market-maker would look at, in general. I am looking at 30-day holding periods, not just a day or two. The logic that I'm explaining refers to the people who watch their stock go down and then they see that Volatility levels are high and think to themselves that "Hey, this is a good time to sell calls, the premiums are so high." They write the calls and the stock rallies and they get their stock called away. The point being that when Volatility is high, the market has fallen, or is falling, and if you write "at the money calls" when the market has high volatility, the odds are that you will have your stock called away. So, my comment does make sense. And by the way, I was the Registered Options Principal for S.G. Warburg & Co, Inc in the USA, which is now UBS. I agree that I have different ways to explain things, but I'm trying to help people make more sense of how the markets move and what to do.
timwest
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And of course I agree with what you have written, but you just have to stay right on top of the position and be active in rolling up and out.