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

Be Sociable, Share!

Related Posts


MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.

The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The educational training program and software services are provided to improve financial understanding.

The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.