Four Reasons To Avoid Short Vega Trades (for now)

Iron condor traders beware.  That little uptick in the VIX you’ve seen over the past two days might seem like something worth selling, but that uptick just might be the start of a bigger move.  Here’s a look at the SPY daily chart and the accompanying VIX graph from July of last year.

SPY July 2011

See that little uptick from 15 to 20?  That uptick occurred against a backdrop of increasing fear that Greece was going to take down the entirety of Europe; and the fear that the US Government’s inability to settle the debt ceiling crisis only meant that Washington was filled with politicians inept at getting anything substantial accomplished.  What happened a few weeks later?

SPY August 2011

Now, I’ve been labeled as a “doomsday” person more than once, but just take a look at what the volatility looks like today, and compare the backdrop of where we’re at today in the markets, and it might just give you pause before jumping into your next short vega trade.

SPY July 2012

What I see is a similar rise in volatility, without anything even closely resembling an abnormally large market move, and:

1.  A similarly inept US Government trying to borrow its way out of trouble with economic data only getting worse.

2.  Europe still on the brink – if not more so.  Greece in trouble is one thing.  With Spain in the crosshairs, that’s a major problem.  And then there’s Italy, and several other dominoes waiting to fall.

3.  Apple missed.  Enough said.

4.  A lot of other companies are missing, too.  Like United Parcel Service (UPS), Chipotle Mexican Grill (CMG), Netflix (NFLX), Buffalo Wild Wings (BWLD), just to name a few.

A VIX around 20 is certainly much better for volatility sellers than a vix in the 15′s.  But what if the VIX heads back toward 30 or 40?  That’s the question to ask yourself before you sell your next iron condor.  I’d wait and see how the market really reacts to the earnings numbers that are still coming out before diving in with any strategy that loses if the volatility moves dramatically higher.

 

Submitted by Greg Loehr of Options Buzz

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