Are the markets headed lower?

Discussion in 'General Discussion' started by tom, Sep 11, 2015.

  1. tom

    tom Administrator Staff Member

    A friend mentioned to me that a lot of people are predicting the market to go much lower starting as soon as next week. Let's take a look:
    I'm sure I'm not the only person to see a nice wedge formation in place. If we close below the bottom blue line, I think you'll see a lot of selling which could push the markets lower.

    How much lower and is it going lower?

    Hard to say isn't it?

    Just because a guru or chart pattern are suggesting lower prices, doesn't mean the market will actually do that. However, there is a case that we have entered a bear market so it could go quite low. I am careful these days to have limited risk on the down side (or no risk) and never have more short puts than long puts.

    Evan Rothschild is speaking next week about big market moves and I think this is a perfect time for traders to be aware of the potential of larger moves to the downside and to be prudent with your trades.

    To hopefully take advantage of the dreaded market crash, I put a bearish put vertical on SPX late today as it takes advantage of selling higher volatility than you are buying and the reward / risk of about 2:1 looks nice. Here's the trade:


    The max risk on the trade is about $2500 in a $125k account, so about 2%. I likely won't let it get to that if SPX doesn't sell off in the next 30-days so the portfolio risk is well under 2%. This illustrates a point of not taking too much risk for any one trade. If your max loss in a trade is over 2% of your entire portfolio, you are likely trading too many contracts.

    Make sure that whatever you are trading doesn't keep you up at night worrying about the market crashing. An extra long put can do wonders to help you sleep better. Be prepared to be wrong and have a plan of what you'll do when you are wrong.
  2. GreenZone

    GreenZone Well-Known Member

    You may want to compare the above trade with a 7 lot M9.
    The trades have the same Reg-T margin, same gamma, and the same negative delta....but the M9 has theta of 30.55 vs 3.8 for the vertical and far more available credit for you to make potential adjustments.
    If your bias ends up being wrong, and price breaks to the upside, notice how the M9 remains with a decent amount of positive theta for a much wider distance.
    The "downside" is that the M9 does have negative vega, whereas the vertical is almost vega neutral.

    If you then look at the T+36 line of both trades, the M9 makes twice as much profit as the vertical.

    And then, with the M9, you have an entire trading system which is already defined for how to deal with price moving down or up, how to scale into or out of the trade, etc.
    But even if you just look at the basic structure shown above, the bearish butterfly is pretty hard to beat.
    Stephen, Chuck, Gail and 3 others like this.
  3. Gabor Maly

    Gabor Maly Well-Known Member

    Great posts Tom and Ron, very timely as I think a lot of traders are at a decision point or contemplating putting on some sort of a bearish trade including me. One thing that puts me off right now is 1) yes we are in a bearish market but still very much undecided where we want to go, we are in a triangle, can break up or down 2) very thin profile above us, if we do get above, we may just rip through to 1990-1200 level which then would be a much more ideal and lower risk trade for an M9. Entering an M9 here would mean you are scaled in 2/3 when market turns around at 1190-1200 level which is beautiful, but then of course it better turn around, closing above that resistance level would make the prospects of this trade less ideal.
    GreenZone likes this.
  4. tom

    tom Administrator Staff Member

    Thanks Ron. The goal of this trade was to have zero risk on the downside. Otherwise I agree the bearish butterfly is pretty sweet.
  5. tom

    tom Administrator Staff Member

    OFF TOPIC: Ron.. did you notice the new menu item in the main menu? :cool:
    GreenZone likes this.
  6. ACS

    ACS Well-Known Member

    Of course an upside break of the triangle that stops out the shorts first and then fails would not be unexpected.
    GreenZone likes this.
  7. peter

    peter New Member

    I would like to learn more about the M9. Anywhere I can go to get more information.
    Appreciate your help.
  8. tom

    tom Administrator Staff Member

  9. GreenZone

    GreenZone Well-Known Member

    Thanks Tom.
    I think that'll make it easier for people to keep up to date with what's going on in the forum.
  10. GreenZone

    GreenZone Well-Known Member

    Wedges can break in either direction, and they love to do "head fakes" to suck people in, just before they rip their heads off by reversing hard.
    This kind of thing is the main reason I've started getting my head back into hedging style trades, such as straddles/strangles/backratios/etc.
    By doing both trade types then we can continue to trade, yet do so more safely than just doing traditional income trades alone.
  11. Trader G

    Trader G Well-Known Member

    Just curious what others are thinking what is going to happen come Thursday. This market is so compressed I am just sitting on the sidelines. It seems like everyone is waiting for the decision so it makes me wonder if we are going to see large activity Wed/Thurs am ahead of the announcement.
  12. GreenZone

    GreenZone Well-Known Member

    I predict that price will either go up, or go down. ;)
    (at least I didn't say it could go sideways)
    Trader G likes this.
  13. Bruno

    Bruno Moderator Staff Member

    There are a couple of news today and tomorrow that may leak or at least lean toward the Fed's intention on rates. It is likely to be a non-event but the market is certainly looking for a direction. John Locke in his webinar yesterday didn't look too concerned although he is a little biased in favour of another run upward to the 2000 area on SPX.
    The Oct Weirdor is doing quite fine and I took a few weekly calendars hoping for volatility to pick up.
  14. Georges

    Georges Well-Known Member

    Can you show examples doing both trade types at the same time?
    Good to see the separate positions, and then watch the global (ALL) P/L graph, to see the less risk using both?

  15. GreenZone

    GreenZone Well-Known Member


    Here's my income trade.
    It started off as a bearish butterfly (balanced 50 point wings), but I then added a Kevlar (50 point left wing and 40 point right wing) on the right hand side as I scaled into the trade.

    Here is the main hedge, which is a call ATM backspread in SPY:

    Here's another (baby sized) hedge, which is an OTM put backspread in IWM:

    And here are what the combined positions look like:

    I intend to gamma scalp the call backspread, so hopefully the gamma scalping will pay for the negative theta of that trade.
    If this succeeds, then the income trade will still be able to make the originally planned amount of positive theta, and the hedges provide me with a hedge of vega and gamma.
    Bruno, DavidF, Georges and 1 other person like this.
  16. Georges

    Georges Well-Known Member

    Thank you for the nice screenshots. For traders using TOS it seems possible to show different assets at the same time in a P/L graph.
    Optionvue users can not show this global overview for different assets at the same time.

    Can you explain how you intend to adjust the call backspread to gamma scalp? Which legs do you move when underlying move up or down?

    Last edited: Sep 16, 2015
  17. Trader G

    Trader G Well-Known Member


    Fantastic post and it really lays out what your game plan is. I probably spend as much time looking at hedging options as I do my main trades. Your backspread got me thinking about how I can add that in later in my trade to counteract the rising neg gamma (and then scalp it opportunistically to help defray the cost). Thanks again
    GreenZone likes this.
  18. GreenZone

    GreenZone Well-Known Member

    Let's say that the SPY moves down in price, and therefore my position now has -100 deltas.
    In order to make the position delta neutral again, I just need to find some way of getting +100 deltas.
    Here are a few common ways to do it, in order to gamma scalp:
    • buy 100 shares of SPY stock
    • buy one long combo (ATM long call and ATM short put)
    • buy 2 ATM long calls
    • buy back one of your deep ITM short calls (assuming you are using the call backspread I showed)
    • roll down your existing long calls, via a call debit spread
    You would do the opposite if the price were to move up.
    Last edited: Sep 17, 2015
  19. Georges

    Georges Well-Known Member

    Appreciate your detailed explanation.
    Thank You
  20. Trader G

    Trader G Well-Known Member

    You should start a newsletter, it went up and went down. Lack of follow through here has me wondering. I think I will hold off on my November option trading until first of next week. I might be gun shy but I would rather be a spectator for a couple of days to see how this plays out.

Share This Page

  1. This site uses cookies to help personalise content, tailor your experience and to keep you logged in if you register.
    By continuing to use this site, you are consenting to our use of cookies.
    Dismiss Notice