Why is the SPX weekly put credit on the back burner for now?
A picture (or two) is worth 1,000 words. The two charts below, SPX and VIX, show the reason why I have not felt comfortable recommending or trading the SPX weekly put credit spread.
SPX One Year Chart:
SPX continues to hit record highs on almost a daily basis. It is now only just over 37 points before reaching the milestone 2000 mark, and that level could be acting as a magnet.
VIX 5 Year Weekly Chart:
Friday the VIX closed at 10.85, up slightly after touching on a 7 year low earlier in the day.
We are now in the summer doldrums of the annual trading cycle, where volume is typically much lower as investors head to the beaches. All indications are that the market wants to grind higher, however, summer rallies can also bite. When direction changes in such a low volume environment, the change can sometimes be dramatic.
"When the VIX is low, it's time to go. When the VIX is high, it's time to buy". The last few weeks there has just not been enough premium for me to feel comfortable entering a directional credit spread. In order to get an acceptable credit that creates a decent risk:reward ratio, it would be necessary to place the short strike much closer to the fire than in a "normal" volatility range. Some traders may still be continuing with this weekly trade and cashing in, however, being the conservative trader that I am it is outside my comfort range at the moment.
I will continue to trade the weekly Iron Condor test position, and may test the waters with a small live trade in the next few weeks. During these summer doldrums, I encourage traders to trade in a smaller size, and be extra-vigilant if a sudden market move, or volatility spike, has a negative impact on any position.
The next few weeks will likely continue to be the same, lighter-than-normal volume, as investors look forward to the long Fourth of July holiday weekend.
The planned entry for the weekly SPX Iron Condor will be Thursday, depending on market conditions. For those who follow and trade the monthly SPY Iron Condor, the next entry for the August cycle will be sometime the week of July 7.
Trade updates will be posted as appropriate.
As always, trade carefully and stay keen on your risk management.