VIX Jump

on 05 5, 2010

CBOE Volatility Index 05-04-2010

Most of you have been following my webinars with my former company and know that I have been a big believer in owning implied volatility.  The macro environment points to much larger moves and the market tens to become complacent with a nice steady move up in the market.  These spikes come fast and furious and if you do not own volatility before they hit, you will be chasing profits the entire time.  I have consistently suggested to own overall portfolio volatility for such an occasion.  Now is the time when you have plenty of bullets that you can start to let some go at profitable areas. If you own straddles or stangles check for profitability with the increase in implied volatility…you may be surprised.  I found a few straddles that I traded that were still within my break even ranges, but because of the sudden jump in implied volatility, they were not profitable.  Some were just breaking even, but they were losers because decay had gone against me.

From the global view, if all of this fear is over Europe, then we must keep our eyes focused on European countries and their debt yields.  If you recall, the yields are what forced Greece to seek out other financing.  Their sovereign debt yields were double and triple what they normally pay.  If this happens to Portugal, Italy, Ireland, or Spain, then this will become the new global debt contagion.  China is already off 10% this year and the US has gone from 6,400 to over 11,200 without taking any major breather.

We have to keep the big picture in mind when deciding on our current portfolio.  Now that the market has pulled back a little, we have to make sure we keep enough insurance for any major move if it happens.  If the European Union fails then there will be fallout here as well.

There is some small support around the 10,800 level on the DJIA and some resistance tops from mid Jan. at the $10,700 level.  If the news drive the market down through those, then the next stop could be pretty ugly.  The PPT will most likely step in to make it look like this is going to rally, but yesterday was a pretty big failure.  We will probably see a sell off this morning then some attempts to get back some of the loses from yesterday.  If they continue to sell into this then be prepared for larger negative moves to come.

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