Posted on 08/09/2011 1:23:01 PM PDT by ilovesarah2012
Too many people (IMO) now look for this “capitulation” sign. IMO, these sorts of signs won’t be seen again until/unless we get HFT and programmed trading out of the market.
The prognosticators on CNBC and elsewhere look for some of these signs... when the very reason for these signs no longer exists. “Capitulation” was something we’d see when humans would dump huge amounts of stock to the downside as human emotion broke. It used to be a very good indication. It certainly was an indication in ‘87, then in the mid-90’s, in ‘98 during LTCM... and even into 2002/2003 it still held some validity. We didn’t see it on March 09, 2009, and I don’t think we’re about to see it anytime soon again. There’s simply too much automation in the trading in the equities market to use these past history examples. I look now at the overall volume, and the speed/pattern of the reversals. And after the Fed announcement today, you could tell that the machines set in motion some big-money buying.
Will the 1120 support hold? I don’t know. The market could turn around in a half-day and go screaming downwards on exogenous events (as it has been quite a bit of recent.) But valuations going forward were quite attractive this morning, given the past market history and the absurdly low “no risk” alternative investment of US Treasury debt.
I mean, does anyone believe that Intel (the company that makes CPU and a slew of other chips) is going to go out of business? No? So.... why would you turn down a 4% yield when the US 10 year is paying 2.19% or thereabouts this afternoon?
Likewise, the huge move in such a compressed period of time with day after day of downward moves... has built up some very tidy volatility premiums in some option plays which are too complicated to explain here. Such levels of volatility don’t go on forever.
As long as they’re out far enough that the theta doesn’t decrease the value of the put faster than the delta brings it into the money, you should make money.
The VIX can’t stay elevated for very long. Even when we were going positively blind with fury in 2008, the highest levels of the VIX and VXN could not be maintained for very long (relative to an option).
LOL - maybe you should just play the lottery.
But I don't do this with a whole lot of capital so if I lose, I don't lose a whole lot.
I don't have a whole lot of time on the August put I'm holding. The other expires in Sept. so I have a bit more breathing room.
Interesting you mention LTCM. As many forewarned back when that LTCM will haunt us. It was sweep under the run by the Federal Reserve. For the last 20 years its been business as usual, kicking around debt on the books. The debt of LTMC in the late 90’s was unimaginable but nothing compared to the debt cover up today. The chickens will soon come home to roost.
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