Trading in a bear market can present volatile market swings and really hurt if you continually fight the downward trend. This is especially important if you have a long stock position in a 401K or IRA account. You should consider opening up a cash or margin account to offset some of the risk of being solely long stock and mutual funds in your tax-deferred accounts.

You can trade bearish positions within your cash account that are still premium-selling, theta-collecting trades. You will also want to ensure that the trades you are placing are High Probability Trades, meaning when we place the trade, we have a probability of success of 65%-75%. You also want to make sure you are trading in very liquid products, namely Exchange Traded Funds (ETFs). Finally, remember to give yourself some time to let these positions work for you, namely 4-10 weeks prior to expiration.

Taking into account all the criteria listed above, let's find a bearish high probability trade. Let's take a look at one in the DIA in terms of our criteria:

DIA December 102/100 bearish put spread, paying $1.40

Products (ETFs): DIA
Time to Expiration: 50 days
Probability of Success: 70%
Market Bias: Bearish

Probability of Success = Max Loss / Strike Width

Max Loss: $140.00 per one spread
Max Profit: $60.00 per one spread
Break Even: $100.60

With the DIA currently at $89.15, it would take a rally of over 12.8% in the DIA within 50 days in order to lose money on this trade. Remember, this is a bearish position that will pay a return of 42% if the DIA stays below $100.00 by expiration.

thinkorswim, Inc. and its registered employee, Joe Kinahan, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Recession? That's yesterday's news. You want change? Let's talk about the next hurdle: inflation! Don't be surprised if one trillion dollars or more of the bailout spending sparks inflation. What are you going to do now? The only consistent inflation hedges- as if anything is consistent with the recent markets we are experiencing- are tobacco, railroad and utility stocks. These sectors are typically known for high dividend yields and lofty P/E (price to earnings), but with the way these stocks have been beaten down (like MO Altria group, formally Philip Morris), the market has ignored a low P/E multiple of 4 with high 7.25% dividends! And that's not to mention a fat 57% volatility in the options, presenting a fantastic opportunity to try covered calls. By buying shares of MO and selling calls against it, you have decent probability of success in December.



Railroads get a big bang for their buck since they carry exports and imports. So news that the U.S. trade deficit is at historic levels, as imports climbed and exports stayed steady is actually good news for railroads. Is rising energy a concern? Sure, higher fuel costs bump up operating costs, but growing revenue from shipping coal, the cheapest domestic fuel now, should make up the difference. Take CSX, for example. CSX is the third-largest U.S. railroad operator and one of the biggest movers of coal! It has a relatively low P/E of 12%, a dividend yield of 2%, and extremely high option volatility of more then 69%. Buy the covered stock and you have the opportunity to raise that yearly covered return with a strong probability of success in December.



The Williams Companies, Inc. (or WMB) is a natural gas company. The company primarily finds, produces, gathers, processes and transports natural gas, blah, blah, blah...Better yet, it has a low P/E of 8.5% and yields a nice 2.40%, but best of all its option volatility is one of the highest in its industry at a plump 92%. Buy the covered stock and sell calls to write, and again, you have good probability of success, nice!

thinkorswim, Inc. and its employee, Tony Battista, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

There are two primary components that make up an option's price: Intrinsic Value and Extrinsic Value.

Intrinsic value is otherwise known as the "equity" that you have in the option. For a call option, you take the current price of the stock and subtract the strike price to figure out the intrinsic value. For example, if you have a stock trading at $80.00 and you own a 75 strike call, you have $5.00 worth of intrinsic value. If that 75 call expired today, it would be worth $5.00. Intrinsic value is directly related to the price of the underlying stock. As the price changes, the intrinsic value will change.

Extrinsic value is the part of the option that is a little less clear. It's not based on one thing like price, but several things. These things include time decay, implied volatility, dividends and interest rates. As you can see, extrinsic value is a little more complicated than intrinsic value. That said, as you begin to understand the different components that make up extrinsic value, you will be able to make trades based upon those components. Let's break it down a bit further by looking at the two most important components of extrinsic value: time decay and implied volatility.

Time Decay: This is THE ONLY constant in any option. Time will decay each and every day of the week. If you're going to take advantage of something, take advantage of this as it is the only thing you can count on day in and day out. The Greek associated with time decay is Theta.

Implied Volatility: Implied volatility is the market's best guess, based upon supply and demand, of the future volatility of the underlying stock. Trading implied volatility can be a hard thing to trade on individual stocks. One might be better off trading price and time on individual stocks. However, implied volatility can be traded on index products like the SPY. This is because it's a lot easier to forecast implied volatility on the overall market than it is on individual stocks. As the market goes up, implied volatility goes down. As the market goes down, implied volatility goes up. The Greek associated with implied volatility is Vega. The easiest picture of implied volatility is the VIX, which is the volatility index for the SPX.

On the thinkorswim software platform's Trade Tab, you can choose to see the intrinsic or extrinsic value, and the different Greeks that represent the extrinsic side of the option.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

As the market swings wildly up and down (and down), Iron Condors have been a tough trade to manage. I've heard from many people over the past two months about Iron Condors being blown to shreds with the volatility and overall bearish trend of the market. So if you're sick of this market "skewing" you, "skew" it back! Let me explain.

A regular Iron Condor is the combination of a short put vertical and a short call vertical. This Iron Condor has the same width between strikes for each vertical and has the same number of contracts as well. An example would be as follows on SPY:

With the above Condor, one would need the SPY to trade between 110 and 86 to make money. This is fine if your directional bias is neutral and you don't believe the market will move much. For a market-neutral trader, this is perfect. However, for those traders who are more directional, whether bullish or bearish, what would you do to make your Iron Condors more directional? Here are some simple adjustments:

If you are Bullish: Skew the strikes on your short call spread and make them $1.00 wide instead of $2.00 wide. Here's what it looks like on the Trade Tab:

The below figure is the risk profile on the above trade. As you skew it bullish you remove some of the risk to the upside. If the SPY goes through your call spread, your loss will be $40.00 ($1.00 spread - $0.60 credit) compared to risk of $140.00 if the SPY blows through your put spread ($2.00-wide spread - $0.60 credit). This type of skew makes sense if your bias is to the bullish side. You also keep your sweet spot if the SPY does trade market-neutral.

If you are Bearish: Skew the strikes on your short put spread and make them $1.00 wide instead of $2.00 wide. The risk profile would be similar to what you see above, but skewed bearish.

Now as you read this, if you're thinking to yourself, "it would be awesome if I can somehow remove all risk to the upside or downside," I say to you, hah, no problem! To do this, just ratio your spreads 2:1. Let me explain. On the above Skewed Condor you have 1 contract of each vertical. If you are bullish, you would simply sell 2 put spreads to the 1 call spread. Here's what the trade looks like on the Trade Tab:

As your credit goes to $1.10, here is what your new risk profile looks like:

As you can see, no matter how high the SPY goes, you're making $0.10 ($1.10 credit - $1.00-wide spread). If the SPY does blow through your put spread, you're losing $290.00 ($4.00-wide risk - $1.10 credit). You also have the market-neutral sweet spot from 110 to 85 that you can make the $110.00. That is a high probability Skewed Iron Condor.
If you are bearish, ratio your call spread in the opposite way to remove the downside risk.

Things to Remember:

Beware that as you ratio this type of spread, it doesn't remove the risk to the skewed side every time. You may have to do a 3:1 or 4:1 ratio, which may not be worth it. You must also be careful when doing this by understanding the risk you are adding to the trade. Position the size around your max loss so as not to exceed your maximum loss exposure.

So if you're a trader that has some sort of directional bias but still want a market-neutral sweet spot, skewing your Iron Condors could be the trading style for you.

Happy Trading!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Copyright 2008  Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

Over the past three months, the US Dollar has been on a tear against the other global currencies. The dollar has gained, or more accurately "won back," 20% against the Euro, British Pound and Canadian Dollar in the past three months alone. In some cases this has reversed losses made over a year or more. This three month trend is not unique in the world of the Foreign Exchange. The valuation of one currency versus the other is primarily driven by much larger and fundamental economic forces relative to what drives an individual stock's movements. A few of the larger factors that drive currency values are as follows: interest rates and the increase or decrease in those rates by their central banks, inflation, GDP (Gross Domestic Production), trade balance trends, real estate and stock market rates of return. As you can imagine, none of the aforementioned economic forces turn on a dime or pivot on an analyst's rating of just one quarter's valuations, as is too often the case with stock trends. These factors tend to occur over multiple quarters, even years. As a result, currency markets tend to trend in a more consistent fashion and for longer periods than do individual company-based stocks until one of these fundamental factors changes. For this reason, currencies tend to attract technical traders with a keen understanding of fundamental economic forces. A currency trader might look to take a position on a technical pullback in a longer-term trend supported by fundamentals. These can be ideal entry and exit points for swing traders, which tend to make up the majority of the currency trading population (although Spot Forex is also well suited for intraday trading for those that so desire).

The currency markets have only recently opened up to retail traders since the emergence of online charting, analysis and trading tools in the latter 90's. Before this time, the Foreign Exchange, or Forex, was mostly exclusive to banks, multi-national corporations and the ultra-wealthy. My entry into the Forex occurred back in the mid 90's while living in Japan. In order to take advantage of meaningful currency fluctuations I would literally withdraw cash money from my Japanese bank, load it into my backpack and then physically carry this cash to a US bank in Tokyo to have my Yen converted to US Dollars. When the trend would reverse itself I would reverse the process and convert dollars back to Yen, and so on. Not only was this cumbersome and time consuming, it was downright nerve-racking to transport $50K+ through suburban Japan by foot, bicycle, train and bus, and took up the majority of a day's time.

Nowadays, the currency trader and investor have more options than ever. In this article, I'll discuss one of the newest ways to gain Foreign Exchange exposure utilizing Currency ETF's. Rydex Investments has created a series of eight currency ETF's they call CurrencyShares. These ETF's are designed to reflect the price of eight different currencies as valued in dollars. The eight currencies that are represented are:

• FXA - CurrencyShares Australian Dollar
• FXB - CurrencyShares British Pound Sterling
• FXC - CurrencyShares Canadian Dollar
• FXE - CurrencyShares Euro Trust
• FXF - CurrencyShares Swiss Franc
• FXM - CurrencyShares Mexican Peso
• FXS - CurrencyShares Swedish Krona
• FXY - CurrencyShares Swiss Franc

Let's take a look at the one-year chart on the FXE, which measures the value of the Euro against the dollar:

Since this chart measures the value of the Euro in dollars, when the chart is moving up, this represents a strengthening of the Euro, or said another way, a weakening of the dollar. When the price moves lower, this represents a weakening of the Euro or strengthening of the dollar. Between December and February, the FXE was range-bound, finally breaking through resistance on February 26th, supported by both the MACD and Stochastic indicators at the bottom of the chart. A trader taking advantage of this technical move would have enjoyed a nice run up of the FXE until April 20th when the 30-day SMA was violated to the downside. Additionally, the return on the position was enhanced by a $0.41 and $0.46 dividend in March and April. From May through August, the FXE was again range-bound, breaking down through support on August 8th and falling precipitously from 150 to 140 in the following 20 days. Utilizing short strategies such as a short sale, straight put, put spread or bear call spread would have captured much of this downside move.

As discussed earlier, the currency markets tend to be less fickle than the equity markets. However, when they move, they tend to move quickly and aggressively and then establish a new range. Again, this setup provides a technical trader an opportunity to watch and wait for the move and then move into the trade when the opportunity presents itself. Just like stock trading, trades cannot be forced! The chart above shows the FXC, which represents the value of the Canadian Dollar (or "Loonie" or "Cad") as represented in US Dollars. You can see that, starting on the left side of the chart in November, the Loonie was selling off quickly against the dollar. It then found support in the mid 90's in January. For the next seven months, the chart respected that support level until breaking down through 92 and dropping dramatically to the high 70's. Here, an astute trader would watch and wait for such moves and then take a position. Take some time and review charts on the eight ETF's listed above and notice how the currency trends tend to obey Technical Analysis more literally than do most stocks, and act more like large indices such as the Russell or the Wilshire.

The Currency ETF's are a way in which a technical trader that is looking for exposure to the Forex can utilize his/her skills outside of trading Spot Forex or Currency Futures. One other advantage of using currency ETF's is that the majority of brokers allow ETF trades in an IRA. There are relatively few FX dealers that allow spot Forex and Futures to be traded inside a retirement account. However, there are also some issues you should be aware of with the currency ETFs:

•The Foreign Exchange trades from Sunday afternoon through Friday afternoon non-stop, and currency ETF's trade only during US market hours. Since the currency ETF's replicates the move of the underlying FX pair, this means that each morning you will see each of the currency ETF's gap up or down at open from where they closed at 4:00pm Eastern. This lack of control throughout the night can be unsettling and can trigger and execute stop orders upon opening away from where the stop was initially set.

•The variation of interest rates between one currency compared to another can generate monthly distributions that appear like dividends (you can see this in the charts). For example, the FXA (Australian Dollar) is currently yielding just under 7%. Being on the receiving end of these monthly distributions is an added benefit when you are long, but being short the FXA in order to take advantage of a strengthening US Dollar would mean you were on the hook to pay the dividend out of your own account essentially eroding any profits made from the move in the position itself.

•There are options on the CurrencyShares. As an active option trader, this is a terrific benefit for my various strategies. However, the lack of substantial volume creates large spreads and the lack of open interest makes it difficult to execute any more than a few contracts without "slipping" or moving the market with one's own orders, even if rather small. In time, as the retail trader and investors learn more about currency opportunities, I believe volumes will pick up and spreads will naturally tighten, but that will take time. Until then, exercise caution and utilize limit orders if exploring the options on the CurrencyShares.

Despite these shortcoming, the currency ETF's open up global investing, hedging and speculating to the astute trader and offer a simplified, cost-effective way to enter the currency markets. For an active trader, these ETF's are like the family mini-van, not much in the way of sex appeal, certainly not fast, but comfortable and extremely useful, even though it doesn't get you to your destination very fast. On the other hand, the more commonly traded market, the Spot Forex, is like a high performance sports car: sexy, fast, noisy, and will get you where you want to go very fast, provided you don't run it into a ditch along the way and it explodes in a fireball. Regardless, I'm just happy I no longer need to hike around a foreign country with 10 pounds of cash in my backpack...

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

Copyright 2008  Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

I have always believed that where there is peril, there is opportunity; where there is misfortune, there is also fortune. That is the manner in which I approach the current highly volatile and unpredictable market. I realize that many a man and woman with substantial trading prowess has succumbed to unusual losses, but I still contend that there are opportunities. Finding these opportunities requires a very stable constitution and an ability to wade through the daily predictions of financial doom. There are a number of ways to benefit from this financial chaos but we must tread very carefully. Two of the top seven biggest moves in the market percentage-wise occurred THIS MONTH!! All the other leaders were from the Great Depression Era. Yikes.

An extremely volatile market can have many of us gulping Tums and questioning our abilities, but it can also provide unique opportunities in many of the same instruments we already trade. In my case I generally trade broad-based index ETF's and the options associated with them. The movement we are seeing in these indices on a daily basis is similar to what we would see in a month, or even a year!! How is THAT beneficial to my trading?? Very simply, it requires less capital to return the same amount. If I normally trade 1,000 shares of stock or 10 option contracts to achieve my notional profit target, I can do it with 200 to 300 shares and 2 to 3 options now. The moves are that great and that quick. I am throwing less money on the table and reducing my risk capital.

Have you ever been to an extremely overpriced restaurant with a crowd when the bill arrives? Everybody gets alligator arms and wants no part of committing to that. That should be your reaction to this market. I will pay a portion, but I am definitely not going all in! And I do not have to; I can enjoy Fois Gras returns on a burger budget.

Next, we option traders realize volatility can present some nice opportunities. If you are in the business of selling options to collect premiums and are willing to do so in a risk defined manner with call or put verticals, a VIX above 50 can look compelling. Even covered call writes on many of the most stable (HAHA does that exist?) stocks like GE are yielding some unseen returns. At these levels, selling naked puts on some ravaged stocks starts to make sense because the elevated premiums mean you could get them at an even steeper discount to the current stock price. These strategies of selling call verticals, put verticals, covered call writes, or naked puts do have some peril. There are NO lay-ups in this market, but I can sell call or put verticals 12-15% from the current price here in many broad based indices with a month to expiration and still collect nice premiums. Six months ago I would have been selling these 3-4% from the current trading price.

Finally, the ability to execute these and many other trades can be made easier in these markets. While many folks are dismayed by the sudden increase in width between the bid and ask price in stocks and options, the herky-jerky market has a better chance of finding your price if you remain steadfast and stubborn. The market resembles a ping pong ball; I have found myself looking at an execution shortly after I am filled and wondered how it could possibly have occurred. It encourages me to place trades at normally unattainable prices and hope for a stray ball.

Happy Trading!!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

With failed afternoon rallies, retests of the October lows, and retail sales levels tumbling, it is hard to believe that a bottom is in place. It might be time to dust off the old Dow 7500 hats. I hope I am wrong for all of the 401Ks that now resemble 201Ks across America. People need to feel confident in our financial market structure before they start adding more money to it. Do not, however, confuse hope with prudent short term trading ideas. This could be a great opportunity for some long-term plays, especially those of you who like rolling covered calls, but this market looks to be pushing out of its range to the downside. Those aforementioned long-term trades will take a long time to play out. Take a look at the attached graph below. It took eight years to get back to highs set in 1999 before this latest sell-off began just last year. In addition, our recent S&P 500 trading range of 850-1050 could get penetrated very quickly with little support in sight.

Until the market tells me otherwise, I prefer to have a delta-negative bias to my trades. In my opinion, we need to focus some of our strategies toward short-term bearish trades in order to withstand the blows being directed at our retirement accounts. For those of you who only have retirement accounts, you might want to think about adding some short-term long positions in the SDS, DXD, or QID to provide some protection against your long retirement portfolios. These ETFs are ultra-shorts that can help to mitigate some of your long portfolio exposure. I would consider adding to these positions as short-term bounces occur. For example, last Thursday, November 13th provided a great opportunity to hedge some long deltas with these ultra short ETFs. With the Dow Jones Industrial Average in the midst of an 800-point turnaround midday, the DXD ultra-short Dow traded down $11.51 to a level of $74.41. If you would have added the DXD to your portfolio at the end of the trading day for $74.41, that position, according to Monday's close of $84.52, would have yielded $10.12, or 13.60% in less than a week. I am not suggesting trading these ultra-short ETFs alone. I am suggesting adding them to your portfolio in the short-term as a way to decrease your long exposure in these volatile markets.


thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

At the offset one might think the statement "institutions avoid risk" is nothing earth-shattering. In fact, this statement might be considered common knowledge. What I have found, however, is that some of the best trade opportunities stem out of common knowledge fundamentals. Most analysts and traders would agree that we are in the most volatile markets seen in decades and arguably since the inception of the stock markets. Instead of running away from the rising volatility and uncertainty, the prudent trader looks for opportunity amidst the chaos.

In trading, any and every edge can make a difference. Traders are constantly searching for correlations between markets as leading indicators. Although no correlation is absolute nor remains "evergreen," I'd like to discuss one in hopes that it may help you find an "edge" in your analysis. To understand the logic behind this trend, an understanding of the VIX is needed. VIX is the ticker symbol for the Chicago Board of Options Exchange (CBOE) Volatility Index. The VIX is arguably the most popular measure of volatility. The value of the VIX is determined using the implied volatility of options on the S&P 500. As markets are harder to predict, option prices increase due to the implied volatility. Implied volatility, in most cases, is skewed to the put side; meaning puts are more expensive than calls, due to the higher implied volatility in most markets. This implies that with higher volatility, the puts are becoming more expensive at a faster rate than calls. This is also why when the VIX is rising, the stock market is expected to fall. In a roundabout way, one can look at the VIX and determine that a higher VIX reading may indicate a greater chance for a market correction and more puts being purchased. The largest purchasers of puts by far are institutions. Institutions buy puts to hedge or avoid risk. If the larger institutions are buying puts to avoid risk, they are likely avoiding risk or hedging their exposure in other ways as well.

Historically, larger institutions have consistently sold yen and bought other currencies as part of "the carry trade." The carry trade is the act of shorting, or selling a low interest rate currency and buying, or going long on a higher interest rate currency, capitalizing on the difference in yields. The yen has had the lowest interest rate over the past decade and has been the favored currency to short. Though this is a viable investing strategy with great probability, it is highly leveraged and considered higher risk by the more conservative institutional investors. In more uncertain times, institutions unwind the carry trade. In doing so, yen short positions have to be bought back, which causes the demand and price of the yen to rise as these positions are covered. This is why one can see an apparent rise in the price of yen, as there is a rise in the VIX. Though they are not directly connected, institutions hedge risk in numerous ways, causing both the VIX and the yen to rise.

Comparing the VIX with the CME Japanese Yen (continuous contract to show longer-term correlation) for the past 2 years, a correlation can be seen. In the image below, note the significant peaks and valleys of the market by the red horizontal lines. Though the magnitudes of the moves are not equal, the frequency and direction of the moves appear to adjust together. Often times, the VIX moves first. This early move provides an opportunity to be alerted to a pending yen trade in many scenarios.

Figure 1 - The VIX Compared to the Japanese Yen, Looking at Key Directional Changes.

Though more volatile in the short term, the same apparent correlation on the daily charts also occurs on the intraday day basis seen below (see Figure 2).

Figure 2 - The VIX and The Japanese Yen Intraday Comparison Chart

The strategy for trading this phenomenon is quite simple, as it can be included in a normal technical analysis routine. If using daily candles to look for investment opportunities over a period of weeks, one could wait for a significant change in direction of the VIX to either confirm a trade on the yen, or in many situations be the indicator of a potential trade. This is to say a break of resistance in the VIX, will likely see volatility rise and in turn, an opportunity to buy yen may become available. A break below support on the VIX could see decreased volatility in the markets, and a bearish sentiment for the yen would be appropriate. In one month, the VIX found a low near 20 in September and rose nearly to 80 by the end of October. This move frightened many investors in the stock markets; but taking the opportunity to buy yen in this same time period, would have generated over 1400 points on the CME Yen Future (/6JZ8) worth over $17,500.00. The E-mini Japanese Yen (/J7Z8) could have been traded as half-size to the contract and move.

As an example of an intraday set up, here is the VIX intraday forming a wedge (see Figure 3), indicating a consolidation of volatility. A break below support could see the VIX drop back to a reading of 40. A break above resistance could see volatility reach back toward previous resistance near 80. A similar consolidation is seen on the E-mini Japanese Yen (/J7Z8). If the VIX breaks to one side or the other, it is probable that the yen will mimic the move. If either of the above scenarios takes place and the future produces a similar move in price, there is potential of a substantial return in three weeks on the E-mini alone.

Figure 3- The VIX Consolidating in a Symmetrical Wedge

Figure 4- The E-mini Japanese Yen Mimicking the Symmetrical Wedge on the VIX.

Conclusion
Due to risk avoidance during volatile times, institutions will buy puts and unwind higher leveraged trades such as the "carry trade" and short yen positions. This fundamental pressure creates an apparent correlation between the VIX and the Japanese yen. The correlation has even seen the yen give early trade signals. The more conservative trade is to look for the VIX to confirm trades on the Japanese yen. The more aggressive trade being a trade on the yen, based on moves on the VIX without confirmation. For those trading CME futures, both a future and an E-mini are available for the yen. For those trading the spot Forex market, the yen is in the quote position and the above correlations will be inverted. This is to say, shorting the USD/JPY will mirror or be in the inverse of the futures.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.