Another Gap Fade Success! Options Strategy up 24.2% YTD. Enjoy the Profits!
July 22, 2008
Yes, another successful trade in the NASDAQ 100 (QQQQ) Gap Fade options strategy today. The market moved sharply lower at the open and as a result a signal was triggered in the Gap Fade strategy. About 90 minutes later I was out of the trade for a 6% gain on the day. Check out the details of the trade here.
It was the 8th trade of the year. Yes, I have only been exposed to this market for all of 8 days in the Gap Fade strategy. Amazing, eh. Some of you are slowly catching on; trading every day or just using an options strategy that exposes you to the market on a daily basis will eventually catch-up to you. If you feel like you must have action every day then why not at least hedge your strategies with one of mine? As I always say the performance speaks for itself.
I am so incredibly enthused by the response to the strategies as of late. Thank you all for the kind words.
As for the current market, well, IWM is looking pretty sweet right now. The small-cap index has pushed into a short-term overbought state and my shortest-term overbought/oversold measures have moved to overbought levels not seen in well over a year.
Moreover, the several of the sectors I follow have pushed into an overbought state so we could finally see our first Sector ETF Extremes trade. No hurry remember. Patience. Wait for the probability to lean heavily to your side. Opportunities are made up easier than losses.
Oh yeah, I almost forgot, Gap Fade subscribers while you are enjoying the rewards of the strategy don’t get to comfortable. If the market jumps higher at the open tomorrow we could be in for another signal and another opportunity at some nice gains. Upside gaps into “very overbought” states are some of my favorite set-ups.
As always subscribers, I will send you out a real-time trade alert with all of the necessary info if and when a signal occurs.
Until then enjoy the profits and have a great afternoon!
Overbought/Oversold levels for July 22, 2008
ETF Extremes Options Strategy
* S&P 500 (SPY) – 70.5 (overbought)
* Dow Jones (DIA) – 72.9 (overbought)
* Russell 2000 (IWM) – 82.6 (very overbought)
* NASDAQ 100 (QQQQ) – 45.8 (neutral)
Sector ETF Extremes Options Strategy
* Biotech (IBB) – 81.5 (very overbought)
* Consumer Discretionary (XLY) – 66.8 (neutral)
* Health Care (XLV) – 58.4 (neutral)
* Financial (XLF) – 77.1 (overbought)
* Energy (XLE) – 35.5 (neutral)
* Industrial (XLI) – 71.6 (overbought)
* Materials (XLB) – 65.1 (neutral)
* Real Estate (IYR) – 74.7 (overbought)
* Retail (RTH) – 35.4 (neutral)
* Utilities (XLU) – 37.0 (neutral)
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Gap Fade Trade and Much More
April 1, 2008
Gap Fade Strategy
The market gapped sharply higher today and as a result a Gap Fade strategy signal occurred. The Nasdaq 100 (QQQQ) opened at $44.45, or $.43 higher than Monday’s high of $43.10 (reference graph below).
As a result I placed the following trade shortly after the open.
- Buy to open QQQQ May08 45 puts (QQQQS) for a limit price of $1.92.
I did have concerns about the potential of a gap fill (mentioned in the premarket comments on the Insiders page) today. Typically the first few days, especially the first day of the month are seasonally bullish. However, the large gap to the upside today pushed the underlying QQQQ into an overbought state and just under what looked like fairly strong overhead resistance. The risk/reward with such a large gap was favorable so I decided to place the trade. Over the past several months this type of set up led to quite a few profitable opportunities and historically a short-term fade is what often occurs at this juncture.
Shortly after I placed the trade QQQQ began to move higher, pushing ever closer to my stop-loss. Approximately 90 minutes later my stop-loss was hit so I decided to call it quits on this trade.
As always I sent a real-time trade alert to Gap Fade subscribers to sell the May08 45 puts.
- Sell to close May08 45 puts (QQQQS) for $1.60
The loss was $.32, or 16.7%. It was the first loss since the inception of the Gap Fade strategy on 2/1/08. Even with the loss the strategy is still well higher than all of the major benchmarks (S&P, Dow, etc.) up 6.4% since it was initiated roughly two months ago.
The one positive about today is that it displays how I handle losses in the Gap Fade strategy. I want to keep the loss between $.20 to $.35 for each option trade. By limiting my losses I allow statistics (and probability) to work in my favor. This takes all emotions out the strategy which is just how I like it.
I must reiterate that the Gap Fade strategy seeks to achieve small steady gains over the long-term. There are going to be times when I have a losing trade. This is a fact that must be expected and acceptable with any trading strategy.
Here is the key: remain steadfast with your trading guidelines and money management techniques. Keep it simple and allow the strategy to succeed.
Market Review
The upside gap pushed three of the four major indices into an overbought state. Moreover, 7 out of the 16 sectors I follow (Insiders only) have pushed into an overbought state with the most notable being Biotech (IBB) and Utilities (XLU). In the premarket report (Insiders Only) I will discuss this further by discussing potential short-term trades.
The ETF Extremes strategy has also moved closer to a signal. It has been months since our last trade. While it has kept us out of basically the entire bear market, it has also kept us out of very good short-term opportunities. I have remained very, very, very (I could on) patient with this strategy. It takes advantage of extremes in the major indices (much like our new PaperTrade Sector Extremes strategy). It is hard to stray from a strategy that has witnessed gains in excess of 113% since its inception approximately 2 years ago. Most don’t have the patience for this type of strategy. If it was your only trading strategy I could see the reasoning, especially if you are an income trader, but I am not. I present options strategies for the long-term. If you want more action then maybe diversification of strategies is an possibility. I for one could care less about so-called action. All I care about is long-term results. Remember, this is a marathon and not a sprint.
Overbought/Oversold for April 1, 2008
Major Benchmarks
- Dow (DIA) - 70.5 (overbought)
- S&P (SPY) - 71.7 (overbought)
- Russell 2000 (IWM) - 69.6 (neutral)
- Nasdaq 100 (QQQQ) - 73.4 (overbought)
- Emerging Markets (EEM) - 72.4 (overbought)
more overbought/oversold levels on additional sectors found in the Insider’s page (Buy the White Paper and receive Two Months of the Insiders Page Free) – less than $1 a day.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.
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