Trading versus Investing

A few readers asked about the earlier trade I mentioned, and what it means to my longer term views, now that most major indices are negative YTD.

The short answer is not a whole lot. I still think we see even more
weakness into the second half. But we hit levels and saw enough
downside action that a bounce makes sense. Hence, the trading
repositioning.

The longer answer is a bit more nuanced: The SPY Puts were sold
strictly as a function of discipline. They had grown percentage-wise
beyond where I wanted in terms of downside exposure, given where the
market is and how quickly we got here. I still have a decent SPY Put
position, mostly Septembers; Same for the VIX Calls (August).

Buying the Qs was only a "toe in the water" type-modest trade. Since
its now almost in the money by a half point, I’ll move my stop loss to
breakeven. I’ll average up if we rally, and hold the position until it
starts misbehaving.

Now I have some upside exposure if we bounce, and enough room that the
trade should be no worse than a breakeven (unless we gap down hard).

Tonite will be lonely I’ll be able to finsih a sentence without Cody on Kudlow & Co. I’m sure today’s action will generate some interesting conversation.

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What's been said:

Discussions found on the web:
  1. Michael C. commented on Jun 8

    How did the VIX calls act this time around?

    As I recall from many traders complaining last time, the VIX calls didn’t correlate too well with the previous spike in the VIX.

  2. ndk commented on Jun 8

    Michael,

    The problem with the VIX calls is that they’re European-style expiration and the VIX is, well, volatile.

  3. emd commented on Jun 8

    i may be wrong, but to me this market is like a game of whack-mole…. anytime it sticks it’s head up you swing that hammer hard…..

    impressive reversal off the lows and we may some continuation over the next few days, however, the 200 day MA was violated in so many ways it’s barely recognizeable anymore. We’re ultimately going lower IMO.

  4. wcw commented on Jun 8

    I’m betting on a short-term bounce, quite literally. Exited most of my index puts, bought some out-of-the-money short-dated index calls, covered some tech shorts (but not oils or homebuilders).

    My big bet right now isn’t directional or strategic: I finally got my broker to short CRF in decent size yesterday. CRF is a clost index closed-end fund that pays out 13% a year, almost entirely as return-of-capital. There is no question what eventually happens to its 60% premium to NAV; the only question is when.

  5. toddZ commented on Jun 8

    What a crazy day! My positions were down 6% at one point today, only to end the day flat! Great stuff. I took some REALLY aggressive long positions.

    I even moved some retirement money into an S&P fund yesterday and I started to really feel foolish about that one about noon… not so much anymore. I think I can squeeze 3% on a rally.

  6. yc32 commented on Jun 8

    Barry,

    I read Bill Cara’s blog and yours everyday, and have learned a great deal about trading and investing by reading both of your blogs.

    There are several blogs like Bill’s saying bear market already started. There are also other blogs like yours saying there should be a final (summer) rally. Of course, nobody knows for sure what will happen. But, can you talk a little more about why you think there will be a final rally. If it is a gut call, fine. If it is based on some technical or fundmental clues, I will be very interesting to learn about it. I also wonder, whether in your view, such a rally will still happen with a rate hike in June and very hawkish comments after the rate hike. Thanks.

  7. whipsaw commented on Jun 8

    well I sold my Dec140 SPY puts this morning for a 64% gain, but then bought them back late this afternoon for a couple of bucks less. Probably should have done the same with QQQQ and IWM, but I was laughing too hard. :P

    The rally back up didn’t seem to make much sense, so I suspect that the Plunge Patrol intervened. But no matter, so much technical damage was done that I think we will see more blood in the water over the next week.

  8. Leisa commented on Jun 8

    I’m holding Dec puts as follows: SPY 127’s and DIA’s 110’s. I was tempted to toss them around early/mid May when I the market was up, but held fast. Now they are up nicely. I wished I had closed them intraday, but I didn’t have that freedom today. I’m unsure about longetivity of today’s turnaround, and I feel that December has plenty of time to see a meandering market move even lower. I fail to understand why there is still such optimism about business spending. And yes, Kudlow has been harping that for too long. I still think a faltering consumer will hold more sway than business capital spending.

  9. Drew Yallop commented on Jun 8

    I use trailing stops. My broker (IB) advises no because the market can blow through the stop limit when things are very volatile. Plus they say it adds volatility to the market.

    I understand the blow-through risk but why should I worry about increased volatility? Also, why don’t you use trailing stops to ensure that you let your profits run rather then worrying about “downside exposure”?

    Drew Yallop

  10. Leisa commented on Jun 8

    I used to use trailing stops and abandoned them largely because I found that those stops seemed to trigger and then the stock would use that as a pivot point to climb higher. Too many times to be coincidental (and I’m speaking of daily activity).

    Drew, my thinking is that if everyone is using 5-8% trailing stops (like IBD and others suggest), and if you are a market maker or market strategist wanting to enter into a significant, new position, wouldn’t be easy to start selling to trigger these stops (because you know where they are) and enter an attractive position at a much more attractive price? I’m not saying it is a bad practice, but if good techniques are being adopted by the multitudes, then one ceases to have an advantage in using the strategy. Once all of those stops trigger, some stocks go into a free fall–and your sell order could be executed materially below your stop loss. You’re shaken out, and then the stock reverses course and moves higher. It’s happened to me too many times to feel coincidental (or a result of latent paranoia). There’s a reason why some conditional orders are locked–small fish like me don’t get that stealth.

  11. Drew Yallop commented on Jun 9

    Thank you Leisa. I suspected it had something to do with market micro structure. I too have experienced the sudden drop to the stop price and then an immediate pop up. You are not paranoid. We are selling liquidity when we submit any kind of stop or limit order; the people on the inside will often exploit that liquidity in profitable ways.

    BTW I deal only in options, mostly indices. I have a choice of specifying double last prices as the stop trigger. Maybe I will try that.

    Did not understand your comment on conditional orders. Could you amplify?

    Best regards,

    Drew

  12. Guy commented on Jun 9

    Barry,

    I’ve seen you on Kudlow this past week and agree with you on the short-term bottom, given the high-volume turnaround in the major indexes combined with the decrease in $VIX below 20. I’ve found the $VIX falling below 20 has been a good indicator of a turnaround (I think I read it in one of Bernie Shaeffer’s books). It’s always been a challenge finding the next group of leaders. Kudlow mentioned transports earlier in the week, so I bought a small amount of CAL and AMR since they held up pretty well during the decline.

    Going forward, Kudlow mentioned that the increase in jobs in the household survey is potentially a leading indicator for the payroll survey. “Historically, when a big spread opens up between these two series, it is the payroll survey that gets revised upward, or that catches up in future months.” I think he also mentioned that the eurodollar futures predicted an a leveling off of interest rates and a possible decrease later in the year. If the improving jobs picture and lower interest rates are accurate, they confirm the market bottom.

  13. Mark commented on Jun 9

    Barry-

    My wife “tricks” herself into being on time by fiddling with the clock and advancing it 5 minutes. Works for her. So I was thinking your regular readers here could get you a “special calendar” with your own set of days! Sort of maybe when it’s actually Friday you would think it was Wednesday so that those nagging “Ritholtz Early Entries” would stand a chance. I’m in for a buck on the printing costs. Any others?

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