Trading idea

It’s been sometime since I posted and markets have changed quite significantly. So called, “easy” trades have not been working and statistical patterns and relationships are breaking down. However, it can’t go on forever (can it?) At some point, ‘normalcy’ will return to the market and those that survive the meltdown should be in a good position to pick up some good money if they have the wherewithal to do so, think going long stocks in 2009.

So here’s a trade to consider in your PA or longer term account, currently the VIX term structure is in massive backwardation. Check it out:

Unfortunately I don’t have 2009 data (100+ VIX) at home but below is March 2010:

Pretty big difference. Keep in mind that the above charts are the CALCULATED VIX levels from SPX options and not necessarily the VIX futures prices. I thought the charts though really exemplify what’s going on in volatility land. The ‘normal’ shape of the term structure is contango, i.e. front month below back months and if you think about it, makes sense. It should be far more difficult to forecast what happens in 1 year then 1 day. But apparently the market is saying the opposite. So take a look at VIX calendar spreads, short front and long back. Unless your a complete cowboy, look in the back months, i.e. Nov/Dec @ 1.50 or Oct/Nov @ 1.40. Normally these should be at negative values. Keep in mind, the closer your calendar is to front month, the more volatile it will be. I also wouldn’t go in there trading these blindly, the term structure can be REALLY volatile so please tread lightly. This is a trade I am strictly looking at but will enter very very cautiously. Like all spreads, there’s no reason it can’t get wider before it reverts.

~ by largecaptrader on August 21, 2011.

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