Superior Trading Skills through Education

Volatility - Vix - wow! Print
Written by Site admin   
Tuesday, 13 February 2018 14:19

Well that was an exiting few days as the Vix broke out....

The US dollar is fighting back as top dog, stock markets swoon and the VIX, CBOE volatility index rocketed from its old ceiling of 15 up to 50+ then back down to 25! Is this the big one?

Some stock traders have been puzzled and craving volatility, incredulous that the S&P kept climbing almost day after day for months. No one was selling. The market would only go up, despite the Feds raising interest rates and telling us QE was history.

The best game in town was to keep buying stocks and sell volatility by shorting the VIX with the XIV. The XIV is a nice little, inverse contract, that allowed option sellers a sure thing - it soon became a one way bet - and then it didn't.

Last week it was trading at around 140, today, 6 and untradeable. Blown away, taking with it a variety of gunslinger traders and a few hedge funds with plenty of other people's money.

There's an old saying: "The trading Gods must be satisfied". It refers to that aspect of trading psychology when hubris takes over. Arrogance and certainty of the future is so often displayed by newbies and those sucked in by a good story.

By some primeval law, the saying "Pride comes before fall" applies and the markets surely knock those traders' accounts down to size. Those who have been most arrogant and certain of the future become forced to make the biggest sacrifices to the trading Gods.


From the blog

Buy the rumour, sell the fact

Has it all been over cooked? The Trump US$ rally seems to have kicked off on the basis that his policies will be inflationary and so interest rates will have to rise. Added to this, the Fed has been telling us all year there will be at least a modest rate increase. Next Wednesday 14th is the last opportunity the Fed and Janet Yellen have to do the deed, consequently the market is convinced it's a done deal and priced it in with the Trump rally.

But the TMEST swing chart is suggesting the dollar rally could be rolling over. So we had best trade what we see and not what we think, or have been told to think!

Markets have a habit of rising on rumours of good news and then promptly reversing when it's actually announced, as further expectations of good news slip away. Perhaps the market is coming to the idea that the US economy, talked up over the last year is just that, talk.

If Trump is to boost the economy it's not going to happen instantly. Any delays, and if the US economy actually turns out to be weak at the start of 2017, could result in what usually happens in the year following a two term presidency. Recession.

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