Wednesday, August 17, 2011

Trade Update - XIV

In a previous post I outlined how I intended to trade the dip in the market that I expected to result from the press conference at the end of the France, Germany european crisis meeting.

As expected the market dipped during the conference and then began to rise again, I wanted to trade this market movement and so took a position in XIV. See the previous post 'The Fear Trade' for some background on XIV and the advantages and risks of this product.

The following chart shows the price action for XIV over the past five days, the green line represents the S&P500 Index (one of the three main US Stock Indeces), the blue line represents XIV. While the S&P index has moved in a two percent range for the past few days, XIV has moved in a six percent range. My aim is to take a small profit every day by buying XIV near the bottom of the range and selling near the top.

I have added two lines to the chart to represent my entry and exit points. I entered the trade during the sharp dip lower at the end of the European press conference on Tuesday. I originally intended to exit the trade that evening, but set an exit price slightly too high leaving my position open through to today.

My entry price on Tuesday was 9.76, XIV Moved to 10.10 shortly after the open today giving me a paper profit of 340 USD ex costs. I expected the market to move higher from this point, and so did not close the position to realise the 340 gain. The market has since moved lower.

I will be exiting this trade this evening as my original reason for entry has passed. This is a key discipline, by closing the trade I am reducing my 'value at risk' should any unexpected events impact the market.

XIV has been as low as 9.56 (200 USD paper loss) and as high as 10.11 (350 USD paper profit) during todays session, I expect to exit slightly above my entry price of 9.76

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