Wednesday, December 10, 2008

Is the SPX Going to Stick Close to 900?

It is generally my intent at VIX and More not to recommend specific trades, but to highlight different ways to think about volatility. With that in mind, consider that during the past three days, the S&P 500 index (SPX) has straddled the 900 level in the closest thing to a sideways trading range since August.

Since the November 21st low, I have been anticipating that the SPX would settle in a trading range of 820-980. So far the SPX has not traded north of 920, but I would not be surprised to see this happen.

What is even more interesting is the possibility that the SPX might start to feel some gravitational pull around the 900 mark and start trading in an even narrower range, with the 900 area becoming a No Man’s Land of sorts.

If the No Man’s Land scenario plays out even for just the next seven days, it is possible to lock in some nice gains with a straddle (or strangle, condor, butterfly, etc.) on the SPX, the SPY, or one of the leveraged variants.

As the graphic below from optionsXpress shows, the bet is essentially that the SPX will remain in a range of 60 points in either direction (a little less than 7%) in a little less than 7 trading days. The bottom line: seven percent in seven days. Volatility tends to decrease during the holidays, which would be a positive factor for those who choose to sell volatility.

If you are thinking about how one of the new 3x ETFs might play out in a similar trade, BGU is currently trading near 36 as I type this and a short straddle would be profitable in a range of about 28 to 42 – essentially a range of 20% in either direction.

[source: optionsXpress]

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