Will the SPX Stick Close to 900?

It is generally my intent at VIX and More not to recommend specific trades, but to highlight different ways to think about volatility. With that in mind, consider that during the past three days, the S&P 500 index (SPX) has straddled the 900 level in the closest thing to a sideways trading range since August.

Since the November 21st low, I have been anticipating that the SPX would settle in a trading range of 820-980. So far the SPX has not traded north of 920, but I would not be surprised to see this happen.

What is even more interesting is the possibility that the SPX might start to feel some gravitational pull around the 900 mark and start trading in an even narrower range, with the 900 area becoming a No Man’s Land of sorts.

If the No Man’s Land scenario plays out even for just the next seven days, it is possible to lock in some nice gains with a straddle (or strangle, condor, butterfly, etc.) on the SPX, the SPY, or one of the leveraged variants.

As the graphic below from optionsXpress shows, (click to enlarge), the bet is essentially that the SPX will remain in a range of 60 points in either direction (a little less than 7%) in a little less than 7 trading days. The bottom line: seven percent in seven days. Volatility tends to decrease during the holidays, which would be a positive factor for those who choose to sell volatility.

If you are thinking about how one of the new 3x ETFs might play out in a similar trade, the Direxion Russell 1000 Bullish 3x (BGU) is currently trading near 36 as I type this and a short straddle would be profitable in a range of about 28 to 42 – essentially a range of 20% in either direction.

Comments

[Big-P:]

Too much complacency boys. That dead VIX isn't a good sign and I'm going to have to get it jumping again tomorrow.

If any of you are traders as opposed to "commentors" you might do well to position yourselves on the short-side in front of two very specific periods of "selling pressure"I tomorrow.

Both time periods are listed on my BLOG but I'll list them here as well.

Expect some real nastiness into the 12:15 through 1:00 period (est) and again into 2:35 est. (today/12-11)

2008 Dec 11 06:28 AM

[Big-P:]

My money says we do the opposite, in fact, I'd expect the largest price swings of the entire year between tomorrow and the end of December.

The hedge fund managers, who have already been buried, have nothing to lose so they've already positioned themselves on the long-side. Unfortunately for them...they don't have the fire power they once had--because they've lost about 1/2 of their clients' money not to mention the fact that they're prime brokers have been reeling in their leverage.

The way I see it, these guys are out of tricks which means they're primed and ready for me to take them down a few floors.

2008 Dec 11 07:02 AM