<p>My rationale for this trade is equal parts emotion, market forecast, and I have no idea what will happen.</p>
<p>I think there is a good chance market will continue higher short term, especially with the start of a new month and a new quarter. If there is a big up move Monday I don’t want to deal with the emotional pain of missing it. </p>
<p>If the market pulls back sharply after making a new alltime high I don’t want to feel like a complete chump for loading up at the highs. </p>
<p>So you see this trade is on for all the wrong emotional reasons, but it does reduce my anxiety a bit so perhaps it is money well spent. </p>
<p>Buying 100 calls on SPY is 10,000 shares of SPY or $1.568mm worth of stock at Thursday’s closing price! But delta is .1 so it’s really equivalent of $157k worth of stock. I think much of the long weekend was priced into the options by the close, because implied vol was around 7%. We will see how they open on Monday. I will lose money with an unchanged or even marginally higher market, because I bought 500 SDS, which as a 2x short etf is equivalent of around $44k in SPY. So my position is net long but if I am completely and totally wrong the SDS will pay for some of the options. I used SDS partly because I didn’t want to be long additional vol and it is so much cheaper commision-wise, $8 for as many shares as I want to buy vs $85 for 100 options. (April 12 160 Calls) The more I look at the trade the less I like it. It will have to move a whole lot higher, not merely 100 Dow points, for me to make money. The calls take me through the employment data Friday which will be fun if I last that long. Unfortunately the most likely scenario is the market moves higher but not fast enough and I lose on both sides of this trade. LOL</p>
<ol>
<li><p>My sense is that the leap puts do not reflect the contango; as of Friday, the at the money Jan14 puts only cost about 25%, which is way below both what you would intuitively expect based on the contango and the performance over the last few years. But I am worried about the fact that I am missing something because, as dstark says, a lot of very smart people are spending a lot more time than I do thinking about strategies involving vxx.</p></li>
<li><p>With respect to the xiv chart, I would simply observe that people who lost two thirds of their investment in the July-October 2011 correction and then held on had recovered every dime and then some by January, 2013.</p></li>
</ol>
<p>The real problems arise when you get a crash like 2008, where xiv would have dropped 90%. Then, because of the vagaries of compounding, it becomes very difficult to recover.</p>
<p>One thing that would be interesting to see would be a model of xiv performance during the 200-2002 plunge.</p>
<p>I’m not sure what the Dow going up 100 pts has to do with sds or spy calls. We all assess risk differently but the probability that the 160 is going to be itm is only 5 percent. That’s not conservative from my view.</p>
<p>"buy vs $85 for 100 options. (April 12 160 Calls) </p>
<p>EMM1, that would be interesting to see how the vix products would have traded in 2000-2002.</p>
<p>That was a big hit in 2011… I know xiv came back after more than a year…I think some people would not like to take a hit like that. Like me. :)</p>
<p>Those vxx puts look too low…so EMM1, can you run a backtest on what happens to vxx if the vix increases over 20 percent in a year’s time…if the vix increases 40 percent…</p>
<p>I want to steal a NJres idea…what happens if the stock market is higher by another 10 percent or more by 2014? I think there is a good chance the market will be…
NJres gets the credit…</p>
<p>I am looking at some options…that expire the beginning of next year or later…
Preliminary stuff…</p>
<p>Doct, do you want to figure out a few probabilities?
If u don’t want to… That is fine… </p>
<p>What is the probability that spy is 161 at the middle of may
expiration? 162 at the quad expiration in jun? 165 at the jan regular expiration in 2014.</p>
<p>Thanks either way…</p>
<p>Call option premium in the otm spy looks really low… In the near term months…</p>
<p>NJres did a good job whether the trade works or not…</p>
<p>I’ll get back to it a bit later today if you can wait - I don’t think you’re going to trade it today. Birinyi must be happy all the way back to 2009 since he has been one of the most bullish guys out there.</p>
<p>I’ll just point out one more thing about Birinyi as he was on cnbc the other day. He was asked what does he look at. He said he isn’t much of a technical guy but they do have a few technical metrics that they look at. He is mostly a fundamental guy and the most important fundamental that he watches is fund flow.</p>
<p>The thing about NJres trade, I hope he doesn’t mind us talking about it… Is the probability isn’t that high, but the payoff can be high and can compensate for the low probability.
He can make 10 or 20 times his money on this trade…</p>
<p>161 - 26 percent, 162 - 26 percent (interesting), 165 - 32 percent. These are at expiration. The probabilities are substantially higher if you look at it reaching these levels at any time between now and the expirations.</p>
<p>I agree with you… The puts look too cheap… </p>
<p>The volatility has been dropping so long… I was wondering if the contango was a much bigger deal than a 20 percent increase in the Vix. I was wondering how high the Vix would have to rise to make the put trade a loser.</p>
<p>I don’t think that the question can be answered definitively. It depends on the nature of the rise in the vix and the impact of that rise on the shape of the futures curve. For example, if the vix rose 3% per month from these levels and contango remained at 7%, the trade is still a winner.</p>
<p>I think the above scenario is extremely unlikely. If the vix spiked to 20 for a month and there was backwardation for a month in June or Sept…and then the vix slid back to 12…</p>
<p>Would the chances of the trade working still be good? </p>
<p>Have you traded options before? I can’t remember if you ever mentioned that you traded options or not?</p>