Some depositors in Cyprus took a haircut yesterday morning on the bailout from the EU.? When they think about, it after the dust settles, is that some money is better than no money.? Investors in some Spanish banks lost their equity too, so all in all some investors are taking lumps in the Euro Zone.? The same thing happened to Lehman bond holders and mortgage backed security holders here from 2008 to 2011 before the market started to right itself.? Lehman went through bankruptcy and some mortgage backed securities went to 0.? In both cases mostly big investors were hurt, as was the case in Cyprus.? In a sense this is a path that has already been trodden, namely some are going lose and then move on once the debts have been rationalized.? Something similar happened in Greece last year.? This underscores the points that Europe has to bring it budgets in line with revenue.? Much of the Southern European countries have worked on that but the whole thing still makes folks nervous.
The bailout plan was what the market expected last week and there are some aftershocks this week.? The action in the VIX yesterday was telling.? Mark actually commented about it in the morning volatility report that we do.? He thought the rally would not hold and did not like a couple of things:
?
Charts by Livevol? www.livevolpro.com
- The selloff in the VIX was not accompanied by a selloff in the VIX futures.? The April future premium went to $2 over parity when VIX was at a low.?
- TLT big pre-market selloff stopped cold and reversed prior to the open.?
Those two indicators led him to believe the rally would not hold on and that it was a good time to cut longs.? Normally if the futures don?t ?buy? the rally in the SPX something is up.? The TLT as a risk indicator, which was a role it played all through 2012, should have dropped back to the pre-Cyprus levels and it did not.? It actually made new recent highs yesterday before backing of slightly to unchanged in the afternoon.? For our Strategy Letter we closed our short term VXX puts early in the morning once we saw this.
The VIX futures as I write this have come back a bit.? The April premium is about .84 instead of the $2 from the morning, which is a bit more in line.
?
While the market rallied from its lows the path back is not certain.?? What gives us the pause is that the news is out and the IV did not come in; the Treasuries are still flat too.? While I think the IV should come in a bit it is not there yet.? After a shock the market does take some time to digest and maybe this is one of those cases.? It might take all week for things to settle and this is a short week.
The Trade
This is probably a decent time for an Iron Condor in the SPX or SPY.? I like the idea of the short vega but away from the ATM.? Duration and strike of your choosing.? The market will decide at some point if the EU getting serious is a good thing or bad thing and right now the jury is out so I want the position to reflect that.
Also we added a trade in EGO to our Strategy Letter.? Sign up for Option Pit Live and take a look.
If you want to learn what all this means- ?This is the type of information we will train you to analyze in our?gold course. ?If you needed help following this trade, you should be in that course. ?Call us at 888 Trade 01 and ask for Taylor or Joel, OR visit our mentoring page.