June 29, 2017

Archives for December 2012

Time For a Few More Bear Call Spreads (SPY)?

Today's price action had the bears extremely excited for most of the day. While most experienced traders expected some support at the 1400 level I am not sure that anyone was expecting the bounce that we witnessed during the latter part of the day. I am still somewhat bearish. My thought is that we will eventually see the two SPY gaps (11/19 and 11/29) from November close over the coming month. But as we all know there are no guarantees. No one holds the holy grail to trading. Which is why I always make trades with a margin for error. Credit spreads allow me this benefit...and since I have a short-term bearish view a bear call spread is my strategy of choice. What is Bear Call Spread? A bear call spread is a credit spread … [Read more...]

The Only Way to Successfully Use Options Over the Long-Term

Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet. -David Sklansky, The Theory of Poker As I always say, investment success comes from process. Let me explain. Back in my early 30s when I was privileged to live in sunny Flagstaff, AZ, I would take the reasonably short drive to Las Vegas so that I could make one the best bets in the gaming world. For those not familiar with the game of craps, the free odds bet placed behind an opening pass line bet … [Read more...]

The Benefits of Credit Spreads…Gangnam Style Continued

Fifteen minutes before the close today  it looked like the bulls were about to claim victory for the third straight day. But, to the bulls dismay, the bears made a last minute appearance. The push lower took the S&P 500 (SPY) from $144.90 down to $144.00, which is where it sits after the close. The move doesn't seem like much, but the S&P was higher almost 1.0% today, before eventually closing the day down roughly 0.75%. If the bears are serious a move below $142.50 would have to occur before they are taken seriously. Even after the move lower today, there are still several key ETFs that are in a short-term overbought state. I am watching FAS closely and EWY, the South Korean ETF.  A push lower in FAS would certainly be a sign … [Read more...]

The Foundation of Options Trading

Before I get to some market info I want to go over a few options trading basics. The first, and most important step in options trading, is to create a watchlist of highly-liquid, optionable stocks or ETFs. This will be the foundation of your all your trading endeavors. The reason you MUST only use highly-liquid stocks or ETFs is so that you can rely on pricing efficiency. The more liquid the option the tighter the bid/ask spread. This is extremely important because the bid/ask spread impacts the cost of using options. Wide bid/ask spreads eat into the potential profitability of your investment, and contribute to what is known as 'slippage'. The easiest way to search for what I call 'tradeable' options on ETFs or stocks - Volume. I … [Read more...]

December Options Expiration Week is Upon Us

It's finally here. The December expiration cycle ends on Friday and the upcoming week should be a wild one. The push higher today was impressive. I have to admit I didn't think the bulls had it in them to push the S&P's to 1428 (/ES). The move pushed several of the highly-liquid ETFs I follow back into a short-term overbought state. Couple the overbought readings with several bumping up against strong overhead resistance and the pot odds start to lean more towards the bears. Look at the Euro-related ETFs, South Korea and the Emerging Markets for starters. I will discuss what to do in these situations and more in an upcoming subscribers only newsletter. Admittedly, I would love to see a move lower over the next few days so that I … [Read more...]

Short-Term Reversion to the Mean Underway?

With the exception of a few highly-liquid international ETFs that I follow, all of the participants in the High-Probability, Mean-Reversion Indicator pushed back into a neutral state yesterday. The sell-off that began shortly after Big Ben spoke on Wednesday really gained momentum on Thursday and has given all of my credit spread positions some much needed breathing room. But, we should not look at the recent test of our short strikes as anomaly. Remember, even though I begin most of my credit spread trades with a probability of success around 85%, the probability of actually touching my short strike is approximately half of my probability of success (or Prob OTM). You could also look at it by taking the delta (in this case since … [Read more...]

Was Wednesday the Bernanke Top?

To be frank, Big Ben's announcement yesterday was a dud. Unless... You are currently bearish. And if you are leaning to the bearish side you just might have something to grasp onto going forward...at least over the short-term. Shortly after the announcement the S&P (SPY) and Dow (DIA) moved higher, but the higher-beta Nasdaq 100 (QQQ) and Russell 20000 (IWM) never gained any traction. This was the "tell" that should have forewarned the bulls what was soon to come. As soon as Bernanke took the stage at 2 EST all of the major market benchmarks began to crumble and continued so well into the close. But, what is interesting is that we still have quite a few very overbought ETFs on a short-term basis. Until those are resolved I … [Read more...]

The Beauty of Credit Spreads

The beauty of out-of--the-money credit spreads is the fact that I can completely wrong in my directional assumption and still be profitable. Even with the current extended rally into very overbought territory my credit spread positions are still profitable...none of my short strikes have been breached. And with almost every ETF I follow in an short-term overbought state I still expect to see a reprieve over the next few days because this is the most overbought we have seen many of these ETFs in years. The plan remains the same, sell bear call spreads. When the highly-liquid ETFs I follow reach these type of levels the bread and butter trade is to begin selling out-of-the-money credit spreads. Since we are in an overbought state...bear … [Read more...]

A Gangnam Style Options Trade

A Few Random Thoughts Before I get to the nitty-gritty I want to discuss a few random thoughts. It's been twelve days of range-bound trading for the S&P 500 (SPY). The benchmark ETF has been stuck between $140 and $142.50, but the journey through limbo land could be over soon enough. The march into a short-term overbought today could be the last gasp for the bulls. The bears have been salivating waiting for the opportunity to push this market and the pot odds say its a go. The move since November 16th has finally extended itself so the odds are heavily weighted towards the bearish side. If you had employed a few out-of-the-money bear call spreads over the past few weeks you should be in very good shape right now. A … [Read more...]

Friday’s Market Stance and Quick Options Primer

Okay, that had to be one of the most uneventful weeks of the year. The S&P 500 (SPY) closed the week completely flat. Great for those of us who sell credit spreads, but horrible for the directional traders out there (time decay is their enemy). As for the Dow and Nasdaq, they moved opposite directions. The Dow advanced 1%, while the tech-heavy Nasdaq 100 lost -1% thanks to the recent declines in Apple (AAPL). As we head into next all but the Nasdaq 100 (QQQ) is in a short-term overbought state. Couple the overbought readings in the major benchmarks with a plethora of extremes in the other highly-liquid ETFs I follow and you can quickly see what side I will be leaning towards as we head into next week. Quick Options … [Read more...]