After declining for a week straight, yesterday saw yields on Italy, Spain, and Belgium 10 year bonds rise. Not by accident is it that such a rise coincided with the most volatile day we’ve had so far in December, with the VIX rising by as much as 5% at one point Wednesday. Then when European markets closed at 10:30 am yesterday, the markets hit their lows for the day. This isn’t rocket science people, our markets are going to go higher as long as yields on these critical countries bonds stay where they are now.
So with a major ECB meeting kicking off Thursday ahead of a widely anticipated EU summit on Friday we’re looking to the bond markets for clues. The natural inclination is that the yields will creep up ever so slightly ahead of such important meetings, which they did Wednesday. What we don’t want to see happen (from a bullish perspective anyway), is for the yields to start advancing by the 4-7% points that they were throughout much of November. That would be a sign that the bond markets don’t believe any hard core solutions to the crisis are going to come from these meetings.
Such a belief would undoubtedly bring on another wave of extreme volatility, which the VIX showed flashes of Wednesday. This is why we once again reiterate our feelings that implementing a straddle strategy on SPY is the best way to play the market right now. On Wednesday our 123 calls yielded a profit window of 27% while our 130 puts provided a profit window of 24%.
That’s the beauty of a straddle, in volatile markets you can profit both ways. We recommend owning both the call and put until we get a more decisive move in one direction or the other. A breakout above 1,267 would do the trick for the bullish position (so abandon the puts) and a breakdown below 1,244 would do it for the bearish position (so abandon the calls. Either way, we stand to profit assuming volatility keeps up.
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