OK I am beginning to become something of a broken record. I keep talking about following the trend (in case you have not noticed, the trend is “Up”), but then I keep fretting and talk about hedging against a near-term decline using call options on ticker VXX (the exchange-traded fund that tracks the VIX Index).
So which is it Jay, up or down? Well, I claim it can be both. You can be a bullish long-term trend follower and still be concerned and take action to hedge against a short-term decline which does not include “selling everything”.
The Good News
The good news is that the stock market is clearly in an uptrend and in addition (and as I wrote about here (http://jayonthemarkets.com/2013/11/04/santa-claus-is-coming-to-town/) the Santa Claus Rally Time Period begins at the close on 11/22. So in a perfect world one would simply leave well enough alone and enjoy the ride (in case you have not noticed it is not exactly a perfect world).
The Bad News
The bad news is that several indicators that I follow are starting to give warning signs (albeit minor ones) and ticker VXX itself (http://jayonthemarkets.com/2013/10/30/is-vxx-issuing-a-warning/) is currently the picture of complacency. So I have concerns about the stock market in the very near term. At the same time I do not want to “sell everything” and load up on short positions. So what to do? Man the VIX!
VXX Call Option
The position I am looking at involves buying the December VXX 13 strike price call option. As this is written ticker VXX is trading at $12.29 a share and the December VXX call is trading at $0.59 (or $59 for a 1-lot).
In Figure 1 we see the utter lackadaisical action of late in ticker VXX. My own subjective interpretation is that after the shutdown/debt limit “crisis” ended the investment world went “OK, back to the bull market, blah, blah, blah.” Figure 1 – VXX is the picture of “complacency” (Chart courtesy of AIQ TradingExpert)
The thing to note here is that the Average True Range (shown below the bar chart) is down to a level that preceded the previous to “spikes” in VXX.
So in light of all of this, you have got to ask yourself two questions:
Question #1: Do you have any concerns about the stock market in the short-term, “yes” or “no”.
If you answered “yes” to Question #1, please proceed to Question #2.
Question #2: Do you have 59 bucks?