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Short-term Seasonal Weakness Lies Ahead

Today’s Reversal and Extra Premium

The “potential short-term bounce in the making” that I talked about yesterday occurred as expected. SPX hovered above the 1374 support area that I mentioned yesterday for the first half hour of the trading day before fall ing back to the 1374 support area that I have talked about over the last few days. SPX bounced quickly off the 1374 area and moved back to the opening highs before falling back to the 1374 area around noon. This time the support wasn’t there and we witnessed a wash out situation which brought SPX as low as 1364 before the sharp intraday reversal occurred. The bounce began around 1 EST and lasted until the close.  

It looks like the bounce could continue for the next few days, which would play out exactly like the historical seasonal tendencies. If the market is able to move higher over the next day or two I would expect to see short-term post expiration weakness next week.

One thing is for certain, selling premium should be very attractive next week, which should be advantageous for our SPX Short Iron Condor. The extra premium should give us the opportunity to bring in more premium while at the same time widening the chosen range.

Overbought/Oversold levels for March 14, 2007

• SPY - 40.6 (neutral)
• DIA - 40.4 (neutral)
• IWM - 44.6 (neutral)
• QQQQ - 50.4 (neutral)
• OIH - 58.9 (neutral)
• GLD - 39.9 (neutral)

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Spike in premium should bode well for the SPX Short Iron Condor Strategy. Potential short-term bounce in the making.

How long before the bears reappear?

Will the market test the recent lows?

The bulls had a decent week, but it seems as though there is a lack of conviction in the attempted push higher. This often leads to struggles, at least in the short-term, going forward. So obviously I do not think the bulls are out of the woods yet.

Historically, the week of options expiration is fairly strong with Tuesday being the best performing day on average. Friday is the worst performing day during expiration week and as my loyal followers know (as I state it every month around this time) the trading day following options expiration is historically bearish. It is quite possible that we could see this seasonal tendency play out particularly if the market is able to push our indicators back into an overbought state.

Currently our overbought/oversold measures for the major benchmarks are situated in a neutral position. However, our shortest -term overbought/oversold measures are nearing an overbought situation. Moreover, the stochastics that we follow are almost topped out. Basically, we do not see an edge at the moment, but if the market is able to push higher over the next day or two, or just move sideways I think a short-term opportunity could present itself. 

Check out our new SPX Short Iron Condor strategy. There are still a limited number of spots available so there is still an opportunity to participate.

Overbought/Oversold levels for March 9, 2007

• SPY - 51.3 (neutral)
• DIA - 52.1 (neutral)
• IWM - 53.0 (neutral)
• QQQQ - 43.2 (neutral)
• OIH - 68.3 (neutral)
• GLD - 41.3 (neutral)

We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.  We currently follow 2 stock option strategies and one stock-based strategy in our investment newsletter. All of our strategies use ETFs as the underlying. Check it out! You get two free months of our investment newsletter when you purchase our White Paper.

Watch and learn how we implement our strategies.

Have a great night! 

www.crowderinvestments.com

Introducing – SPX Short Iron Condor

You may read some of our trading guidelines below as well as a sample trade that was published in our newsletter ahead of the December option expiration cycle.

Advantages of the Short Iron Condor Strategy – Crowder Style

1.The strategy is a credit spread which means time decay is your friend. Most options traders lose value as the underlying index moves closer to expiration. This is not the case witht he Short Iron Condor strategy, as the underlying SPX moves closer to expiration and remains in our chosen range the strategy makes money.

2. The strategy is a one-month trade (expiration to expiration) that does not require constant monitoring off the market.

4. Can make 4% to 14% a month.

5. Uses the tracking stock for the Standard and Poor 500 stock index (SPX), the 500 largest and most stable companies as the underlying.

6. The strategy enables you to determine your potential profit/loss and risk/reward before the trade is placed.

7. If the underlying SPX closes within the chosen range at expiration, your pre-determined profit is made.

8. Section 1256 tax advantage

Sample Trade from December

Position

The price of SPX at the close of options expiration is 1399.76. Our range choice is 100 points. We want to be as neutral as possible in when choosing our range.

Our trade:

Sell to open SPX Dec06 1445 calls Buy to open SPX Dec06 1455 calls

Sell to open SPX Dec06 1345 puts Buy to open SPX Dec06 1335 puts

Total net credit – $1.20 per SPX Short Iron Condor

• Lower break-even = sold put strike – total net credit

= 1345 – 1.20 = 1343.80

• Upper break-even = sold call strike + total net credit

= 1445 + 1.20 = 1446.20

Now we can calculate percentage returns, maximum profit, maximum risk, and break-even levels to see if the trade fits our investment objectives.

1. First let us figure out our margin for the trade. Since we have 10 points between our long and short strikes we can assume the following.

Margin = (difference between the short and long strikes – total net credit)*100

= (10 – 1.20)*100

= $880 per SPX Short Iron Condor

2. Now we can go ahead and calculate our maximum profit on the trade including commissions. It is assumed our commission is $1.50 per contract and since an Iron Condor requires 2 spreads (bull put spread and bear call spread), at least 4 contracts are needed or $6.00 per Iron Condor. Basically, the maximum profit per trade is the premium that you collect for selling the bear call spread (short call vertical) and bull put spread (short put vertical). The max profit occurs if SPX closes between (1345 – 1445).

Max Profit = (total net credit*100) – commission

= (1.20*100) – 6.00

= $114.00 per SPX Short Iron Condor

3. The next step would be to figure out our maximum loss. The maximum loss occurs if the SPX exceeds the lower or upper breakeven points calculated above.

Max Loss = margin + commissions

= $880 + 6.00

= $886.00 per SPX Short Iron Condor

4. Lastly our percentage return including commissions is:

Percentage return = (max. profit/max. loss)*100

= ($114.00/886.00)*100

= 12.9% on the trade

While this is a fairly conservative strategy as options strategies go, as you can see by the max loss the potential for a big loss is possible, especially if the market moves sharply in one direction in a short period of time. In most cases, the spreads can be rolled up/down to widen the range, so the max loss is somewhat deceiving, but you must be aware that a max loss is possible and should be considered when utilizing this strategy. Diversify! Never put all of your eggs in one basket.

IWM - 50.2 (neutral)

QQQQ - 44.6 (neutral)

OIH - 67.1 (neutral)

GLD - 44.6 (neutral)

Where will the consolidation lead?

Will the recent consolidation lead to another test of the recent lows? As I have stated over the past few days, I think so. While the market moved notably higher yesterday it still was unable to move our overbought/oversold significantly higher. Furthermore, our shortest-term overbought/oversold indicators still have plenty of room until the probability for a short-term decline is significant. Until we see another extreme, it is a guessing game in my opinion which is why I would rather stay on the sidelines at this point. This is one of the keys to success for our ETF Extremes strategy.

I apologize for the short posts recently. I am concentrating my efforts on updating the website and the newsletter. I should be back with some interesting additions to the blog next week.

Overbought/Oversold levels for March 7, 2007

• SPY - 39.7 (neutral)
• DIA - 40.0 (neutral)
• IWM - 37.8 (neutral)
• QQQQ - 35.2 (neutral)
• OIH - 62.9 (neutral)
• GLD - 41.9 (neutral)

We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.  We currently follow 2 stock option strategies and one stock-based strategy in our investment newsletter. All of our strategies use ETFs as the underlying. Check it out! You get two free months of our investment newsletter when you purchase our White Paper.

Watch and learn how we implement our strategies.

Have a great night! 

www.crowderinvestments.com

Anticipated short-term bounce occurs. What next?

The anticipated bounce off very oversold levels occurred today. The move was sharp, yet it still was unable to bring the major benchmarks above 50 which is often a sell signal for many traders. I expect to see the push higher continue until weeks end, but I am still somewhat leery about the sustainability of the move. I would not be surprised to see the market test the recent lows and potentially break through those levels. We shall see soon enough.

The Vix moved lower today, losing 18.7%. Ideally, I would like to see the Vix back near 20 or at least hover around  the 15-20 range as premiums will be significantly higher as a result. This will make options selling strategies, like our SPX Short Iron Condor, much more attractive. The increased premium allows us to choose between keeping our current 100 point range and taking in more premium as a result or widening our range to further increase our chances of the underlying expiring within our chosen range. The latter would aim to bring in the same amount of premium since we initiated the strategy in our newsletter three months ago.

Overbought/Oversold levels for March 6, 2007

• SPY - 40.6 (neutral)
• DIA - 40.5 (neutral)
• IWM - 38.5 (neutral)
• QQQQ - 38.2 (neutral)
• OIH - 46.8 (neutral)
• GLD - 40.0 (neutral)

We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.  We currently follow 2 stock option strategies and one stock-based strategy in our investment newsletter. All of our strategies use ETFs as the underlying. Check it out! You get two free months of our investment newsletter when you purchase our White Paper.

Watch and learn how we implement our strategies.

Have a great night! 

www.crowderinvestments.com

A surge in the VIX

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