I am mostly in cash going into this week (65%). I have some Jan and Feb Rhino trades but I am not fully allocated by any means. I am going to wait until after the fireworks that will be OPEX and the Fed meeting before entering more of these. After such a harsh down move and the potential for wild volatility in either direction, it’s just not worth it. Any large up move will bring challenges to the Rhino. In fact, If we had a quiet week, I’d have removed most of January Rhino trades @ about 5% profit.
However, I will be selling put spreads @ 15 delta (same strikes as you would for an MIC) on any big weakness on Monday or Tuesday. The strikes will likely be way way OTM with the surging VIX and it should give us a perfect risk reward trade. If, after I sell these, the market continues to push sig. lower, I’ll manage by buying bearish butterflies along the way and perhaps some debit spreads. I am looking forward to taking advantage of a waterfall event this time around. We should have a down Monday as the stat is 95% of the time we have a 1.5% or greater move on Friday, you’ll have a lower low on Monday.
Oil was down 11% this week and since the high yield market is quite exposed to oil, there is credit concerns. Selling was extreme on Friday and that usually means further weakness. However, breadth is at extremes, the NYMO is at extremes, and VIX gained 63% this week. Those types of extremes usually mean a bottom is soon coming and we’re entering a bullish period. My bet is more pain on Monday/Tuesday, followed by a rebound.