The Right Trading Style

Just as I began to put together this article I received an email from a company that indicated “The Great Crash of 2014.”  Of course it was the same company that began last year with “The Great Crash of 2013.”

We all know how 2013 ended up – making all time high prices across both the Dow 30 and S&P 500 (the Nasdaq is almost 200 points from its 1 March 2000 highest price).

However we do know that markets do not go straight up in prices for years on end. There is, on the average, a 4-5 year cycle to the market that is being reached now in 2014.

How do we know what action to take at any given time?

Will we get warning signs without having to listen to market forecasters who have proven to not have our best interest at heart?

The $VXO

The $VXO has always been a really reliable measure of what is happening in the market place. That is like measuring “fear” in the market.

If the VXO is low, fear is low and the market is rising, if the VXO is going higher then fear is rising (investors are concerned about the potential to lose money being in bullish positions) since the market is now dropping in price.

The VXO comes in the form of a percent and I like to use the target prices below to enable me to know what is happening in the market.

vxo

When the VXO is low we can participate in the Investing style of trading (however the Implied Volatility (IV) on stocks should be above 27% otherwise the stock may not move very much in the timeframe that we are in it).

We can also participate in any other short term style of trading however our target will be 3% with a 3-4 day exit.

Investing After Earnings method is ideal however we must purchase both the Call and the Put option at the same strike price (also known as a Straddle).

Once the VXO begins to rise and goes into the high volatility price a Straddle may not be effective with this style of trading. It would be best to Strangle the trade. With a high VXO our short term trades can now target 5% with the same 3-4 day exit.

With the VXO at extremes we cannot place a stop loss. However we have something better then what we had the last time the market dropped like a rock (2007-2008) and that is weekly options!  Now we can use these to protect our position where we will be in for 3-4 days anyway.