This type of strong action put many of my colleagues trading verticals in a very tough situation, as the call spreads originally placed above recent highs are now threatened.
I traded out of the RUT call spreads early this morning at a profit, closing them for a debit of $2.90. This provided us a profit of 75 cents for a two day trade. The Dec30 SPX calls at 2860/2870 are the only trade left in the portfolio. I need to take them off when we finally get a some pullback.
Our objective is to put on some put spreads this month, but we need some pullback from this overbought situation. Some interesting items to note that explain how overbought parts of the market have become. In yesterday's blog, we highlighted the RSI reading on the RUT. A similar situation now exists with the SPX. Additionally, today's the SPX will close outside of the two standard deviation Bollinger Band. This is a rare event. In the last year, it happened (maybe - just barely!) once before. Also this is the third time this year that the RSI on the SPX is in an extreme overbought area.
Another rare event occurred today with the VIX. As the SPX rose, so did the VIX. Increases in volatility occur right after the SKEW goes above 130. Today was a good example of this phenomenon. The VXST rose more than 8% today actually.
