Playing the Short Side on SPX
So lately I’ve really shifted my portfolio strategy into selling SPX puts and playing the options on individual stocks during earnings. However, this had me thinking (and worrying) about the risks of getting caught in a surprise downturn event: August 19, 2015 the China market crash and Black Monday on October 19, 1987. These events weren’t exactly Black Swans since there was a bit of leading up to these events if you were to take a look at the macro-economic indicators at the time. Thus, I’ve decided to create this general guideline for myself regarding these indicators as flags so that I can be more cautious during these build ups:
- Unemployment Rate Rising > 4.6
- National Financial Conditions (US Leverage) > 0.0
- Yield Spread > 2
- Industrial Production Consumer Goods Month Over Month Decline for 3 Consecutive Months
- Real Retail and Services Month Over Month Decline for 3 Consecutive Months
- New Housing Starts Month Over Month Decline for 3 Consecutive Months
- China Confidence Index Last Month Decline < -3%
The current levels of these indicators are as follows:
| Date | SPX | VIX | Unemployment Rate | Yield Spread | National Financial Conditions | Real Retail and Services MoM Change | Industrial Production Consumer Goods MoM Change | New Housing MoM Change | China Confidence Index MoM Change |
| 05-01-2017 | 2388.33 | 10.11 | 4.30 | 1.40 | -0.50 | 0.17% | -1.63% | -4.89% | -1.23% |
| 06-01-2017 | 2430.06 | 9.89 | 4.40 | 1.19 | -0.49 | -0.03% | 0.15% | 9.16% | 1.16% |
| 07-01-2017 | 2429.01 | 11.22 | 4.30 | 1.23 | -0.51 | 0.37% | -1.96% | -3.53% | 1.15% |
| 08-01-2017 | 2476.35 | 10.09 | 4.40 | 1.18 | -0.53 | -0.46% | 0.68% | 3.41% | 0.09% |
| 09-01-2017 | 2476.55 | 10.13 | 4.20 | 1.15 | -0.56 | 1.00% | 0.95% | -4.48% | 3.40% |
Although right now I am selling SPX puts naked, I would definitely change my strategy to SPX put spreads should VIX inch above a level of 13.
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