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Welcome to Summer Trading


This chart shows the S&P 500 etf (SPY), and the lower indicator is the 10 day historical volatility.

It currently sits around 5%.

That means if we were to continue to see this kind of price action, we should expect the S&P 500 to be about 5% higher or lower from these prices in about a year.

Of course, that doesn't happen, as volatility cycles from low to high... but it has been a grind.

So we've got the actual vol at 5%, and the VIX under 12% for some time.

The "traditional" response here is that it means we are due for a selloff.... that when the VIX is low and the market hasn't moved in a while it clearly means it's time to be bearish.

I'd like to point out that from what I can tell this is the consensus. And that the true contrarian bet is actually looking for more upside.

And you know what?

It would be nice to see a pullback. I would prefer it.

But the other scenario here is that vol comes off the floor but it's not the end of the world. And instead of seeing vol head back to 20%, it just normalizes to 12%.

More summer trading.

Here's the beauty of this kind of market.

When vol is low, it also means correlations are low. It's a stock picker's market.

The indexes can rotate and go sideways and pullback... and in the meantime you can have setups underneath the surface trigger.

Both to the long side and short side.

What this means is-- don't get lost in the noise.

Way to many people are getting sucked in looking for a market top and the next big macro move, when the better edge is to look for stocks moving after earnings and placing your bets there.

Looking for the Pre Earnings Run in CRM


As we head into earnings season, one of my favorite trades is to look for stocks that will move in anticipation of their earnings event.

What happens here is that investors, exepcting good news from the company, will start to buy the stock before they release earnings. This casuses a "pre-earnings" run in the stock. (CRM) has a lot of potential for this kind of setup. It doesn't report earnings until the middle of August.

And if we start to see good earnings across the board in the tech space (like MSFT, QCOM, and FFIV already have) then we should see the stock start being bid up in anticipation of its event.

On top of all this, it doesn't hurt that the stock is trading just a few points short of all time highs, and has seen volatility compression the entire time since its previous earnings event.

Look for the stock to run another 5 points before its earnings event. I like using bull call spreads, and if you want to be aggressive you can just buy calls straight up as earnings will help to keep the option premiums elevated.

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You Have No Choice But To Be Bullish on US Stocks

Just two weeks ago the S&P 500 was down at 2000, and we currently are around 120 points higher.

This "call" may seem a little late, but in the context of the range we've been in, this current move could just simply be a blip.


Given the current situation, we have been in a cyclical bear market in the context of a secular bull market.

You  may ask yourself...

"Self, how can we be in a bear market when we haven't seen a 20% drop?"


Markets can correct through three ways: price, time, and momentum.

For two years, US stocks have been in a sideways corrective pattern with plenty of shakeouts.

Now let's put in the past two years in the context of a few global macro events:

The Crude Oil Market Collapsed


Too much leverage and too much supply led to a structural collapse in oil. Over the course of two years, oil ran from 110 to 30... basically a 70% drop in prices.

It wasn't just crude oil... the entire energy and materials complex was hit aggressively:


Over the course of a year, XLB (S&P 500 Materials ETF) dropped over 30%.

And XLE (S&P 500 Energy ETF) was cut in half.

What happens if we look across the pond?

Overseas Markets Finished Their Bear Markets

A look at EEM (Emerging Markets ETF) shows how much damage was done over the past few years:


A 40% drop.

Similar instances can be found across the globe.

If you've been waiting for a bear market... you missed out. There were and have been plenty of established and mature bear markets and it's possible that those cycles are over.

3 Volatility Events

spy-standard deviation

This is a weekly chart of the S&P 500. The lower study is a standard deviation plot, which shows us how big the week's move was in relation to the past half year's volatility.

We have seen 3 major volatility events over the past two years: the ebola crisis, the China currency crash, and the risk rotation at the beginning of the year.

Three major shakeouts. If investors were scared for any reason whatsoever, they've had plenty of opportunities to sell their stocks.

In fact, that's what we've seen. Equity fund outflows have been negative for basically the entire year.

US Treasuries Have Gone Parabolic


This is a weekly chart of TLT, an etf that tracks long duration US Treasuries.

The lower study shows us how many weeks in a row that we have seen the etf overbought.

As it stands right now we have had 5 consecutive weeks above the weekly upper bollinger band.

That has happened only 2 other times since 2008.

In fact, for the first tie since the market crash in 2008, the S&P 500 dividend yield is now higher than the 30 year treasury yield.

The reason for this move is pretty simple.

30% of all sovereign debt now have negative yields. That means you have to pay their governments to own their debt. This doesn't make sense to me, but it is what it is.

So we've seen capital flight back into US Treasuries as it is the best yielding instrument right now.

The Total Setup

Let's put this all together.

Over the past two years, we've seen a Brexit, a Chinese currency crisis, an oil shock, and a biological outbreak scare.

During this time, oil stocks got cut in half, emerging markets were down over 30%, the BRIC countries are getting slammed, and European stocks also got nailed.

There was also a crash in the British Pound to levels not seen since 1985, and the Swiss Franc had something like a 20 standard deviation move.

We're also sitting with US Treasury 10 year yield at 1.3%.

Oh and one more thing: the Fed stops their Quantitative Easing at the end of 2014.

Now think about this...

If I came to you back at the end of 2013 and told you all of this would happen in the next two years, where would you put the price of the S&P 500, the Nasdaq, and the Dow Jones Industrial average?

Unchanged? Heck no.

You'd say we'd already be off 20% along with the rest of the global macro landscape.

What we are seeing here is an "in spite of" trade setup.

The S&P 500 is about to hit all time highs in spite of all that has gone on.

The US Markets have "zagged" while everthing else "zigged."

Absence of a trading signal is just as important as the obvious one.

Think very carefully about how you want to position yourself headed into the Fall of this year.

How to Get the 10,000 Foot View

I'm a believer that knowing the big picture will help you better frame your trading decisions in the short term.

Yet there is a problem...

You can end up getting lost in the wash.

Too many headlines, too many talking heads, too much noise.

That's why it's absolutely critical that you follow price action instead of the headlines.

Because if you'd listened to everyone else over the past two years, then you're probably one of those people that contributed to net outflows in stocks.

Yet if you follow price and keep a level head about you, it's much simpler and much more profitable as an investor.