It has been quite a hectic and frenetic day, so I am just getting around to writing out the logic behind today's short cover of my November (VIX) $35 puts. Basically, I was betting that once the S&P 500 hit the first technical downside target at 1,065, a long overdue and furious short covering rally would ensue. This was when the (VIX) was trading just shy of $46.
This was not only an important Fibonacci level, it also showed up in the technical models of several different persuasions. Such a rally would cause the market volatility to plunge, (VIX) to collapse, and the $35 puts to soar.
By closing out my short $35 puts which I used to lower the cost of entry on the (VIX) bear put spread, but keeping the long side in the $40 puts, I was tripling my bet that volatility would fall. In options argot, I jacked up the delta on the position from 10% to 38%, making it much more sensitive to market movements, something you always want to do when a position is about to make a sharp turn in your favor.
That is exactly what we got. After covering my short, the (SPX) rocketed by 65 points, and the $35 puts squeezed up from $2.20 to $3.50, a pop of 59%. The long puts I kept jumped 42% from $4.80 to $6.80. The (VIX) went out today at $37.72, some $5 down from where I made my move. This enabled my Macro Millionaire virtual hedge fund to post a year to date gain of 40.87%, a new all-time high, and the first time over 40%. This is how it's done.
I don't know if any of you have noticed, but I have now posted 17 consecutive profitable trades for Macro Millionaire over the past two months, and I will be gunning for number 18 tomorrow. I don't do this very often, but it has occurred before. I have been working my ass off trying to clock as many profitable trades as I can while trading conditions are ideal. Wait for crappy trading markets to take those extended European vacations, as I did earlier this summer.
It just so happens that my particular strategy and philosophy on risk control are ideally suited to these kinds of extreme, choppy conditions. It was a skill that I developed trading the horrific Japanese bear market of the nineties. I have been able to do this while many of the largest hedge funds have been put through a meat grinder, with Q3, 2011 stacking up as the worst in 15 years for the hedge fund industry. I never was much of a joiner.
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please visit the following link: Macro Millionaire
By. Mad Hedge Fund Trader
John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.… More