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Divinations in Forex, Commodities and Economic Patterns

VIX in Feburary Housing’s impact on EUR/USD – Loss/Cover Play


This was a 3278/3250 -12 noon. (Long EUR/USD at 3278 short 3250 @ 93) I took on at 9am. In play today was today’s Feb. Housing figures and Event Risk – the capture of British sailors by Iran and rising oil, all adding fuel to the fire, no pun intended. Naturally all this would lead to a >7 pip VIX risk, even for my most modest clients. Even a non-event risk like the Federal Reserve last week announcing they there would be no change in rates caused a >7 pip VIX shot.

Loss/Cover Play:  My initial stop loss on this trade was -25 pips (3253), and my bine close I set at 63 (+30 pips). This is one of those classic stop-loss covers. If EUR/USD stopped out, it would of breached the bine close for the cover-stop-loss. However, the VIX event horizon more than likely would have covered a $7 loss on the 12 noon 3250. Eventually my cash got closed out at 3340 on this trade by a tiny trailing stop I kept moving up, for a net pip gain of +50 in 1 hour.

A simple buy-into-VIX straddle on both of these at 9:30am could have also been employed, but the same leverage was closely met by the cash + 1-sided bine strategy employed. I attached today’s graph just to show the bine’s (green lines) and the price going through these levels. As you can observe, the straddle would have been successful given the propensity for the price to climb through the 3300.

The one advantage the VIX straddle has over cash is the delta. VIX was priced, but the VIX surge was not. Thus the change in OTM bines per pip from, say 3280 – 3310 would have been around 50% greater than most cash – leveraged accounts of the same amount. For example, from 10-15 to 60 $ per contract as it went ITM, even with 2 hours until expiry.

Today’s VIX was pretty much skewed. Apparently the Street was caught off-guard with the February’s Single Home Sales. Even CNBC noted the impact February’s weather may have played on this figure.

Filed under: stop-loss,

EXAMPLE OF EUR/USD +3280/3300 -10am est

The above is an example of the time line of the stop-loss cover conducted yesterday (3/20)

6:09: Long Cash at 3280
8:44: entered an order to sell 1 HS 3300 at $55 when the underlying was at 1.3295.
8:48: my cash position was hit with the stop-loss of $50.
9:02: the 1 HS Short position was hit at 55 when the underlying was at 3305
10:00: HS contract closed ITM for a $55 gain.

So, rather than a -50 loss, the intended effect on the HS covered the loss with an incidental $5 gain. One thing to notice is that the placement of the stop is as important as the important as the price of the HS. Once could of used a more generous stop-loss thereby allowing the cash position to survive. Or, one could of employed buying the 3330 OTM when the cash position was put on . It depend when you want to risk the premium, early the trade or later on, as in this example

Filed under: stop-loss

EUR/USD ATM Strike Compression

4:39 PM 3/19/2007eurusd-atm-strike-compression.PNG
Due to the “Win/Loose” characteristic of the binary, VIX plays the greatest role in the instrument’s valuation at the 9am, 11am, 1pm and 3pm time frames as they are all 1 hour left until expiration and choice cut for time premium trades.

The Strike Compression attempts to spread a stop-loss position, in this example a $6,650 margined position at 50%, against a HS position of 4 contracts valued at $50, when the strike is slightly OTM to the price at the time the binary is put on. The ATM strikes compress time values, like going through a wormhole, as HS deltas explode. 

The example to the left shows the cash position’s stop-loss netted to the binary position. The upper right purple quandrant reflects the net amount the cash is negative until it breaks event above .0008. The purple shaded under HS shows Cash netted against the HS loss, but this is all. The real spread advantage is the larger font figures down below the HS purple range. If your system ranges > 8 pips, then this makes sense for the cash-sensitive.

CONCLUSION: If your system requires that you hold a cash position, why not open up your trades to capturing short term ATM spillage? A lot of HS member also appear to set OTMs that blow through the ATM and then exit at pre-determined ITMs. Either way, using expiry or compression, large orders in noisy markets would benefit from this phenemona.


Filed under: stop-loss

Pre-mature stop-loss hedge example

4:06 PM 3/16/2007
stoploss25bine.PNGStops are imperfect. I’ve blown up many a trade that continued in the right direction after my stop-loss was hit. In today’s trade, the sell short level was hit at 3318 but the stop-loss took me out at 9:40am at 3328.

A 12pm 3325 bine could of been implemented when the cash sell short was hit at 3318 at 9:15. At that time one could have been put in an order to sell the 3325 (yellow line) The theoretical price to set the sell should be near to stop-level. This was the midsection of the two Bollinger Bands (brown bands). The 12pm binary sold at 3325 would have closed at a profit. Depending upon your cash position, the premium may have covered the stopped loss. and then some. 

This strategy is only useful if your technical study experiences a lot of noise within ranges, trendlines or S & R levels. Rather than being wipsawed, bines could be entered to match/cover the loss. This gives you the flexibility to raise your stop-loss from the price action to maintain your position. But it comes at a cost. If VIX dries up, you losses would compound. Separate VIX models would need to be implemented to justify the success of this strategy.

Hedge funds may be okay with entering back into the market at losses, but if they have VIX on their side, the leverage of  binaries increases the speed more than the volume of return, like regular options, yet with a higher delta. 

Filed under: stop-loss

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