One “Option” to Trade the Summer Doldrums

Spring is here in Vermont, well, almost. The recent two feet that resides outside my window is Old Man Winter’s last attempt at redemption after a poor showing this past winter. The market has essentially rallied for two straight months, but May is upon us. and we have all heard the old adage “sell in May and go away’. Here are just a few stats that tend to back-up the phrase spoken frequently among traders and Wall Street over the past few weeks.

May is historically one of the weaker performing months. It is something to consider over the intermediate-term in this already overextended market. I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if actually backed up typical range-bound summer months also known as the “summer doldrums”.

• Jan. –     1.4%
• Feb. – (-0.2%)
• Mar. –   1.0%
• Apr. –    1.3%
• May –    0.3%
• Jun. –    0.2%
• Jul. –     0.9%
• Aug. –    0.0%
• Sep. –   (-0.6%)
• Oct. –     0.9%
• Nov. –   1.8%
• Dec. –    1.7%

The Stock Trader’s Almanac states that a $10,000 investment compounded to $544,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

Keep this in mind as we move into the summer months. Corrections happen. Flat periods happen. The market can’t continue to advance in this manner without corrections and lengthy consolidation periods. This is the nature of the market. Consider learning alternative investment strategies as a way to diversify your current portfolio so that you are better equipped in any market environment, bullish bearish or neutral. Over the next few weeks I will mention some of my favorite strategy-related books that will hopefully assist you on your journey to becoming a more knowledgeable and in turn, confident investor.

So, the question is, how can we make money during the historically flat period from May-October. Well, look no further than an Iron Condor Strategy. An iron condor performs best during a range-bound environment. It never hurts to learn an alternative investment strategy to see if it meets your risk profile and more importantly, if it can help you achieve a higher potential return in your overall portfolio. The strategy is not a “get rich quick” strategy and it has some obvious risks like any other leveraged investment strategy.

However, risks can be reduced in many ways, position sizing, defined stop-loss, etc. But, another way is to limit short iron condor positions to particular expiration cycles. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. If you think that history will repeat itself this year then you might want to investigate an Iron Condor Strategy that fits your risk profile.

Stay tuned for more info on Iron Condors and how I plan to implement them into my Options Portfolio on the website.

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Don’t try to be a hero when trading options!

Money management, capital preservation, stop-losses, and position-sizing are (in my opinion) the keys to options trading success. Trying to be a hero when a position moves uncomfortably away from you can (and often) leads to disaster. All traders at some point have experienced this at some point. Almost every trading text out there decribes, in great detail, the authors great epiphany after a disastrous, account depleting journey in trading. These one or two failing experiences seem to create that “ahhhh” moment where, as a trader, you ”get it”.  The reason I mention this is that so many times in a market like we have experienced over the past week traders that are long, continue to be long, in the face of a sharply declining market. Why? Losses are going to happen. It is what you do to avoid taking large losses that keeps you in it for the long-term.

Options trading seems to create a “get rick quick mentality” that attracts the “speculative gamblers” out there. To me this approach seems short-sighted, unless that is your goal and you are willing to take the risk. I prefer to take the “long-term” approach that attempts to beat the market over an extended period of time. Admittingly, I “go for the gold” sometimes and place a highly speculative trade. But those are few and far between and I would never allocate a large portion of my portfolio to a trade like this. It is just too risky for my blood after what I have experienced as a trader. Take the loss and move on. Think in terms of probablities. Use a scientific approach. Losses are a cost of doing business. It is how your account compares to the benchmarks after a long-period of time that defines your success. Any Joe options trader can make a bundle on a trade. It is how Joe performs over the long-term that defines his success.

Getting incredibly excited for the $5,000 to Infinity options portfolio to begin!

More to come…..

Stay tuned!

Kindest,

Andy

$5,000 to Infinity

The $5,000 to Infinity options portfolio will officially begin next week so stay tuned for upcoming trading guidelines to some of the options strategies I will employ. It should be an educational and enlightening journey and hopefully in the end, a prosperous one. I look forward to moving through this with a community of like-minded options investors/traders.

As for today, well, the market finally moved lower after sitting in a ‘very overbought’ state for what seemed like an eternity. Greece was to blame for the decline, but I think we all knew that this type of day was right around the corner. We have had similar news on Greece, yet the reaction of the market was notably different. It was a technical sell-off pure and simple.

I will be watching 1180 in the S&P tomorrow. If it holds we could be right back to the highs, but if it fails get ready to feel what I think will be some short-term pain. I would imagine a trading range could be established over the coming months. Ever heard of “Sell in May and Go Away”?

More to come….

Have a wonderful night!

Kindest,

Andy

April Continues to Shine for the Bulls

As I have stated before April is historically the fourth best performing month with an average return of 1.25%. The historical performance of May and June are substantially lower at 0.16% and 0.17%, respectively. After a nice run for the bulls in the first quarter could we possibly see the old Wall Street adage “sell in May and go away”? If April happens to live up to its historical billing of being bullish, I think the old adage has a wonderful chance of ringing true this year.  I just can’t see the market continuing to advance at its current pace.  I will be back with more this afternoon.

Moreover, stay tuned for the intro to the $5,000 to Infinity options portfolio. The new portfolio which will define how I trade and view the market will not limit itself to one particular options strategy. I will incorporate appropriate options strategies (i.e. iron condors, credit spreads, diagonal spreads, technical and sentiment extremes, gap fade trades, etc.) given the attitude of the market. I hope this can be an educational and prosperous experience for all of us and one that can be an integral part of growing as options traders. Join the community! I welcome all comments.

Kindest,

Andrew

Historic Extremes in Several Options Indicators

Yes, I am still sticking with a short to intermediate-term move to the downside over the next few weeks to months. I will not repeat my  post from yesterday (Click Here), but I will say that the decline, if and when it happens, should move back down to the gap from 3/5. The probability of the move has increased further given the recent historic extreme in the ISE Equity Put-Call Ratio.

The reading has pushed to 276 at yesterday’s close which makes it only the fourth such reading to move above the notable 275 mark. This means that traders purchased nearly three times more call options than put options.

It has been a month and a half since the S&P has lost more than 1% so it makes since that call buyers have become more and more speculative as time has passed.

There have been four other times when the ISE Equity Put-Call Ration has pushed above 275 and each time the S&P has declined dramatically over hte next two weeks.

6-15-07 – S&P lost -1.9%

7-12-07 – S&P lost -4.0%

10-8-07 – S&P lost -3.2%

10-28-07 – S&P lost – 6.6%

As you can see it does not look too promising over he next two weeks for the major indices given the aforementioned. Couple this with a ‘very overbought’ market and short-term seasonal bearishness and Mr. Probability quickly swings towards the bearish camp.

Of course, as we all know there are no certainties in trading. However, as a trader, I thrive when the probability leans so far in one direction and now is one of those times. Again, there are no certainties, but probabilities are all we have as traders, right?

I hope all of you have a wonderful night and a great morning!

Kindest,

Andy

Market Continues to Muddle in Overbought Territory

Nineteen out of the last twenty-one years have seen a rise in the S&P 500 during the first fur trading days in April. What does that mean? Well, that means that tomorrow should be the last of the short-term bullish sentiment (at least over the short-term). Moreover, the fact that the major indices have once again pushed into a short-term ‘overbought’ state means that the probability of a decline increases even further.

My feeling is that the S&P 500 has maxed out its gains over the short to intermediate-term and should push back, at least to the gap from 3/5. More specifically, a move to the $112.34 in the S&P 500 (SPY) or $45.76 in the NASDAQ 100 (QQQQ).

I hope all of you have a wonderful night. Enjoy the game!

Kindest,

Andy

Overbought-Oversold levels for April 5, 2010

ETF Extremes Options Trading Strategy

* S&P 500 (SPY) – 81.7 (very overbought)
* Dow Jones (DIA) – 77.8 (overbought)
* Russell 2000 (IWM) – 75.5 (overbought)
* NASDAQ 100 (QQQQ) – 76.7 (overbought)

Sector ETF Extremes Options Strategy

* Biotech (IBB) – 65.4 (neutral)
* Consumer Discretionary (XLY) – 79.3 (overbought)
* Health Care (XLV) – 51.7 (neutral)
* Financial (XLF) – 84.4 (very overbought)
* Energy (XLE) – 83.3 (very overbought)
* Industrial (XLI) – 79.2 (overbought)
* Materials (XLB) – 78.2 (overbought)
* Real Estate (IYR) – 76.5 (overbought)
* Retail (RTH) – 69.2 (neutral)
* Utilities (XLU) – 74.5 (overbought)

Ultra Extremes

* Ultra Long (SSO) – 81.9 (very overbought)
* Ultra Short (SDS) – 17.2 (very oversold)

March Blues for the ETF Extremes

Our current ETF Extremes position has endured a rough March. I still expect the market to get whacked over the next few weeks due to all of the bearish extremes that have been built into the market during the March rally. My expectation is to see a move that brings the QQQQ back down to the gap from 3/5.

As I stated before there are quite a few bearish technical extremes that have been reached over the past few weeks with the most recent being the Equity Put/Call ratio. It has moved to the third most extreme since the bull market began one year ago. Two out of the three occasions have led to a short-term reprieve.

Another bearish sign is the lack of small options traders to willingly buy protective puts. This is one of the best contrarian indicators and one of my favorites. Currently, small options traders have only spent 14% of their total volume buying protective puts which is an incredibly small percentage especially considering the recent, low-volume rise in the market. This almsot always spells trouble for the market going forward, particularly over the short-term. This should certainly help our current ETF Extremes position if indeed all of these bearish indicators prove true. If not, this could be the worst trade in the almost four-year history of the ETF Extremes portfolio.

I apologize for the lack of post over the past few weeks. I am currently finishing up my book and website on Iron Condors.

Stay tuned!

Kindest,

Andy