To our way of thinking, the equity market is changing its character and we are doing our best to keep up with it. On October 9, 2018, we did not like how the equity market was trading (we noted the uptrend had broken), so we suggested investors get short IWM by selling a call spread or buying a put spread. Since we were looking for a volatility move, buying the put spread was our favored structure. To refresh your memory on what we had to say, click here.
With the uptrend broken, prices fell sharply. As our readers know, spread structures lower your cost but they also limit your potential gains. So 10 days later, we suggested investors close that trade and initiate a new one with lower strike prices. To refresh your memory on what we had to say, click here.
The equity market continued to trade down and this new trade moved into the black as well. By October 25, fear was clearly in the market, which is generally a precursor to a bottom in price. As a result, we suggested investors close their bearish positions. Furthermore, the financial press was talking about the October smackdown so we felt this was added evidence that a correction to the selloff we near. At this point, we felt investors who held bearish positions should cover them and initiate a bullish position at the same time. We suggested buying a call spread on SPY. To refresh your memory on what we had to say, click here.
We did not quite pick the exact bottom, but we knew that if we caught the falling piano on the exact moment of the bottom, it would be by luck. But we were close enough and equity prices bottomed on October 29. Prices began to move sharply higher before the election and continued with panic buying afterword. On October 30, we noted that volatility was looking toppy, so it presented another way to participate in a relief rally. As a result, we suggested investors sell volatility by selling a call spread on VXX, one of the long volatility ETFs. To refresh your memory on what we had to say, click here.
