Heavy Market- Going Short
Here’s my short term trading idea- time to go short.
The larger market has been chugging up the charts relentlessly, all fear virtually gone. This is not an environment that lends itself to no risk in the market.
The VIX - the measure of levels of fear in the markets, has all but disappeared. Remember, I wrote a BLOG on using the VIX as a counter intuitive tool to clue us into making trades on the over market.- VIX at or below 20- too much complacency- sell.
VIX at or above 30- too much fear- buy the market. Here’s a chart of the VIX:
As you can see, the last time the VIX was this low was back in October 9th. Sorry you can’t see the timeline, but trust me, that was the time frame.
By November, we started into one of the ugliest four months I can recall in the stock market’s history.
We’re not going into another period like that as a lot of the damage has already been priced into the market. However, I do feel we are overdue for a multi week correction.
Here’s a look at the QID- the ETF I have chosen for my own account to get into a short position:
This is the security I have chosen to take a short bet on the overall market for my own money. This is the QID- an ETF that trades inversely to the QQQQs on a 2 for 1 basis. Anotherwords, if the QQQQs go up 1%, QID will go down 2%, and vice versa.
Today, as a starting position, I picked up 2,000 shares of QID at an average cost of $38.67. I am prepared to go a little deeper, or perhaps even own some puts if we go much higher.
The only wild card- options expiration tomorrow, where things can be a little wacky. I could be prepared to go even deeper next week if the market hasn’t started a corrective phase.
Comments and questions are welcome.
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I don’t know about this VIX thing. Looks to me like from 2004 to 2007 the VIX barely ever made it above 20. Only in 2007 has it actually made it above 30 ever. Good call on the QID. If you took profits. Looks like the price is back where we started when you made the call originally now though. time to double down?
Editor: I have not done so yet. I did not close out, but obviously I wish I would have in light of the surge. Now, I’m down a little. However, I still like the trade, and am just looking for exhaustion on this rally to add to the position. I still believe we are going to see $44 to $45 on the QID, even if it takes into the summer to get it done. Will be posting a new BLOG on this issue today for the weekend. Thanks for bringing it up. BTW- If I had sold, I would have posted a note.
Comment by simmso — 5/29/2008 @ 9:13 am
I agree that going long the ultra short Qs (QID) is a safer bet than buying puts on the Qs. With the low VIX, I purchased ITM puts on the Qs a coupla weeks back and got burned. I’ll see how the options expiration pans out tomorrow & will probably buy a few hundred shares of QID Friday at the close or during the trading day on Monday. Buying puts in this environment even with the extended low reading on VIX is just too risky unless you go a few months out.
Al
Editor: Yes, I really got burned on some puts on an individual stock- RIMM to be exact- I couldn’t go out to far because the premiums were huge. I’m expecting a corrective phase to start within the next two weeks, and it could go on for some time. We are overdue.
Comment by Anonymous — 5/15/2008 @ 4:43 pm
I’ve picked up some June puts on the QQQQ’s over the last two days so I’m feeling the same way as you are. My question is (as I’m new to options) what do you mean by “wacky”? What usually happens at option expiry days? Even though I’m a bit down on today’s market I’m not too worried. I have usually been selling with 10-30% gains so far.
Chris J.
Editor: Glad you went out to June. I mean the market trades in ways that don’t make sense just before and on options expiration day. I should have maybe waited until Monday to put the position on. However, I’m pretty certain we are due for a pretty decent correction, so I have a lot of conviction on this theme. I’ll commit a little more if the market continues to rise. Yesterday, the market was up, but on very light volume without enthusiasm. At the slightest sign of unexpected trouble, fund managers will scramble to lock in their profits of the last 7 weeks.
Comment by Chris J. — 5/15/2008 @ 3:50 pm
Good call on the QID, I aqgree, way too much complaceny. Take a look at your old friend BPTR, which u use to cover. they reported a huge quarter today, almost two cents per share, but the stock is still stuck at .06. Have you heard anything on the stock recently.
Editor: Wow- the banks being in turmoil must be an opportunity for them. There’s another company that had a good, profitable year or two, but couldn’t sustain it. Stock traded great for a while then fell apart.
Comment by Ed — 5/15/2008 @ 3:04 pm
Didn’t you mean calls on the QID’s if you’re betting on a rise there. Whew, trying to keep this straight. Thanks
Editor: No- you buy calls on QID if you are betting the market is going into a corrective phase.- Anotherwords, down. Remember, if QQQQ (NASDAQ 100) goes down 1%, QID goes up 2%- so, if you buy calls on QID, you are really leveraging. I am betting the market will go into some sort of corrective phase in the next two weeks. More in the weekend edition.
Comment by potterdude — 5/15/2008 @ 10:16 am