How did options strategies react to the plunge today?

November 1, 2007

Yesterday I stated in the blog:

Historically, when we see the S&P up over 0.5% and the 10-year Treasury notes up over 1% following a Fed announcement the market has a tendency to struggle over the short-term (1-5) days.

Couple the aforementioned historical tendency with the benchmarks we follow nearing overbought territory and you can see why the market could struggle over the next few trading days.

The post-Fed decline occurred today and now the indices we follow are nearing an oversold territory. Moreover, futures after hours are pointing to a lower open tomorrow. Of course that could change as we near the open tomorrow but if the market does happen to gap lower tomorrow the market could reach an extreme oversold state which would most likely lead to a signal. We shall see soon enough.

Iron Condor

Over the last three expiration cycles (including the November cycle) we have used an extra wide range accepting the fact that we would take a smaller gain (7%-10%) per expiration cycle, but knowing that the wide range would allow for extreme volatility in the underlying S&P (SPX).

Our prior losses were due to a smaller chosen range. The trade-off of attempting to increase the monthly gains is a choosing a smaller range for the underlying S&P (SPX) to move around in.

I am not saying that one way is better than another, but from prior experience I feel much more comfortable going for a extra-wide range and taking the 3%-10% monthly gain. Obviously, from this point forward (actually from the September expiration forward) we will be implementing this way of trading the Iron Condor strategy. Adapting to the current environment is the most effective way to trade a given strategy. With the VIX (investor’s fear gage) moving off of historical lows we are able to extend our range substantially. Currently our range allows for a move of 8% to the upside/downside over a four week period before the strategy is in jeopardy of taking a loss.

SPY Diagonal LEAPS

The strategy lost a bit due to the severe drubbing that the S&P took today. However, the loss was actually less than the underlying SPY, which took a loss of 2.3% today. The SPY Diagonal LEAPS strategy only lost 2%, which for a leveraged investment is well, very good. Why was the loss less? Because the underlying SPY moved back into our wheelhouse. If you recall we are short the November 150,151, and 152 calls so the pullback actually moved us back within the range of our short strikes where theta once again can do its magic. Remember we are better off with the underlying SPY closing the expiration cycle within our chosen strikes. Yes, we will still profit with an upside move, but the gains will taper off the further away we move to the upside. Why? Delta. I will discuss this in-length tomorrow. Stay tuned.

Overbought/Oversold for November 1, 2007

S&P (SPY) - 36.1 (neutral)

Russell 2000 (IWM) - 30.2 (neutral)

Dow (DIA) - 33.9 (neutral)

Nasdaq 100 (QQQQ) - 50.5 (neutral)

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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Fedspeak and the Aftermath

October 31, 2007

For those of you who don’t already know the Fed decided to lower rates by a quarter-point to 4.50%. It was the second straight reduction this year. As expected, immediately following the announcement the market experienced several violent whipsaws only to finish the trading day substantially higher. The S&P (SPY), Dow (DIA) and Nasdaq 100 (QQQQ) finished the day higher 1.0%, 0.8%, and 1.4%, respectively.

Now What?

Did you notice how the bond market responded to the announcement? The benchmark 10-year Treasury note spiked after the news and advanced over 2% by the end of the trading day and 4.4% since late Tuesday.

Historically, when we see the S&P up over 0.5% and the 10-year Treasury notes up over 1% following a Fed announcement the market has a tendency to struggle over the short-term (1-5) days.

Couple the aforementioned historical tendency with the benchmarks we follow (found below) nearing an overbought territory and you can see why the market could struggle to advance over the next few trading days.

SPY Diagonal LEAPS Strategy

The strategy continues to make strides up $1,681 or 8.4% in our test account. The fact that we begin each expiration cycle long one LEAP allows the strategy to take advantage on any significant upside moves. We begin the cycle long one LEAP contract because we want a hedge just in case the market rallies significantly over the course of the expiration cycle. I would like to see some bumpy roads ahead so that we can see just how the strategy reacts during adverse conditions..

Overbought/Oversold for October 30, 2007

S&P (SPY) - 65.2 (neutral)

Russell 2000 (IWM) - 60.5 (neutral)

Dow (DIA) - 63.8 (neutral)

Nasdaq 100 (QQQQ) - 73.5 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Seasonally Bullish

October 29, 2007

Before I move into today’s price action and what the next few trading days look like I would like to reiterate the overly bullish seasonal conditions that the market has entered.

The last three days of October and the first three trading days of November are overwhelmingly bullish. Going back over the entire history of SPY (12 years), not once did the aforementioned time frame finish lower.

Furthermore, the Stock Trader’s Almanac has the six days marked with a bull symbol. This signifies favorable seasonal conditions with the S&P finishing the days higher 66.4%, 81.0%, 61.9%, 71.4%, 66.7%, and 61.9%. It is the longest string of “bull symbol’ days in the must-have reference.

The market traded in a fairly tight range today and will most likely continue this type of price action until the Fed rate announcement late Wednesday. Once the rate announcement is released I expect to see volatility pick back up. Obvious right? The best case scenario, for my trading style, would be a sharp move to the upside that pushes the current overbought/oversold levels into “overbought” to “very overbought” territory. If price action plays out similar to the aforementioned then I expect to see the probability lean towards the short-term bearish camp later this week. Until then I am still patiently waiting on the sidelines.

Ahh yes, the New SPY Diagonal LEAPS strategy that we created a mere five weeks ago is up 6.97%. Over the same period the underlying SPY is up only 1.1%. We continue to follow the strategy in the community blog and in greater detail for our paid subscribers in the newsletter. Interest in the new strategy has been overwhelming and may cause us to limit the number of subscriptions that we allow. If all goes well, we will introduce the strategy for auto-trade over the next few expiration cycles.

Overbought/Oversold for October 29, 2007

S&P (SPY) - 65.3 (neutral)

Russell 2000 (IWM) – 56.7 (neutral)

Dow (DIA) - 64.4 (neutral)

Nasdaq 100 (QQQQ) - 61.6 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Strong Seasonal Winds Blowing In

October 25, 2007

With only four trading days left in October will we see the historically bullish seasonality that occurs during the last three days of October and the first three trading days of November. Going back over the entire history (12 years) of SPY (S&P) not once did the aforementioned timeframe finish lower.

Given the recent price action and the bulls ability to keep the benchmark S&P above its 50-day moving-average I think the seasonal winds could be blowing at our backs again this time around. I would prefer to see another heavy sell-off tomorrow so that the major indices we follow reach an ”oversold” to “very oversold” condition. If this price action occurs then we could see a signal in our beloved, yet admittedly frustrating (at least for those who want action) ETF Extremes strategy.

Our Iron Condor trade looks great as we end the first week of the November expiration cycle and the SPY Diagonal LEAPS strategy contniues to blaze forward with an exceptional 4.7% gain during its first five weeks of existence. We will continue to follow the basics of the strategy in the community blog and a more in-depth look in our Monthly and Expiration Reports (Subscriber’s Only).

Our delta sits at 164, gamma -18 and theta 21. Remember we always start out each expration cycle long one LEAP contract so we expect to see an overall delta position similar to the current reading of 164.

Overbought/Oversold for October 25, 2007

S&P (SPY) - 43.3 (neutral)

Russell 2000 (IWM) - 39.9 (neutral)

Dow (DIA) - 42.6 (neutral)

Nasdaq 100 (QQQQ) - 45.5 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Market Neutral, Condors and Diagonals

October 23, 2007

The short-term bounce that I first spoke about late last week seems to have exhausted itself. The short-term bounce could continue, but the high risk/reward position of the trade seems to have faded as prices have risen.

The market still seems a bit heavy to me here. I know the market has performed exactly as it should have after the new-high correction, but there are a few underlying indicators that are starting to make their way to the forefront, at least over the short-term.

The Nasdaq 100 (QQQQ), which is often viewed as a leading indicator, is once again nearing a short-term overbought situation. Moreover, the upside gap in the tech-heavy QQQQ also went unclosed. Couple the two aforementioned situations and I think you can see where I am going: the probability of a short-term reprieve has increased. With the market currently in a neutral state I would like to see a further push into overbought territory to allow for a better risk/reward setup, so I will be patiently waiting on the sidelines until that type of favorable setup presents itself.

I continue to be amazed with the 260 point range position in the S&P (SPX) that we were able to establish in our Iron Condor strategy. As long as the VIX chops around the 15% – 20% range I expect to see simialr wide-range (high probability) positions in the future.

The 260 point range allows for the underyling S&P (SPX) to move of roughly 8.5% to the upside or downside before our position is in jeopardy of a loss.

The second expiration cycle for the SPY Diagonal LEAPS strategy is underway and the strategy has already pushed higher $246.50 in our test account. The strategy is in its fifth week of existence and has gained approximately $960 or 4.8%.

Our November short strikes in the SPY (mentioned in Friday’s (10/19) post) sit at 150,151, and 152. The three short call positions expire in 24 days. Our long LEAPS strikes continue to be 125 and 130. Both expire in December 2009 or 787 days.

The delta is hovering around 170 with a gamma of -16 and a theta of 22. For the most part we want to remain long in the strategy, which is why we go into the beginning of each expiration cycle long one LEAP contract. What does this mean? We carry 5 long LEAPS contracts and sell four against them. This allows for some upside protection and gives us the ability to make adjustments easier when the indice inevitably moves lower. Hopefully we will see the market vacillate widely over the next four weeks so that we can see how the strategy reacts under adverse conditions.

Overbought/Oversold for October 23, 2007

S&P (SPY) - 40.8 (neutral)

Russell 2000 (IWM) - 47.1 (neutral)

Dow (DIA) - 34.9 (neutral)

Nasdaq 100 (QQQQ) - 66.2 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Sell In May Revisited and Indices In A Very Oversold State

October 19, 2007

Before I delve into the options strategies we follow and how the performed during the October cycle I would like to touch on a post that I write back in late April/early May of this year.

On 5/3 I first spoke about the old Wall Street adage “Sell in May and go away. As many of my loyal readers know, I mentioned it several more times over the course of the next few months.

On 5/4, when the market officially moves into the aforementioned adage, the S&P (SPY) was trading at $150.75. Today the S&P (SPY), closed at $149.67 lower -$1.08 or -0.7% since the ”sell in May” period began. Once again, the seasonally flat period between May-October proves it merit.

Okay, back to today’s market action. Whew! More than a handful of options strategists were hurt by today’s price action. Our strategies actually had a wonderful expiration period. Our Iron Condor strategyamde 7.9%, the ETF Extremes held flat (no signals), and the New SPY Diagonal LEAPS strategy finished today (after rolling our short positions into November) up $670 or 3.4% for the October expiration cycle. Today’s move certainly made its mark on the strategy, but when the S&P falls sharply, we should expect to see losses.

As I mentioned above we rolled our short positions this afternoon. We made the following trades:

Sell to open 1 SPY Nov07 151 calls

Buy to close 1 SPY Oct07 151 calls for a credit of $2.86 or $286 (calendar spread)

Sell to open 1 SPY Nov07 151 calls

Buy to close 1 SPY Oct07 152 calls for a credit of $3.58 or $358

Sell to open 1 SPY Nov07 152 calls

Buy to close 1 SPY Oct07 152 calls for a credit of $2.96 or $296

Sell to open 1 SPY Nov07 150 calls

Buy to close 1 SPY Oct07 154 calls for $4.48 or $448

Again, our hope is that after we educate you on how this strategy works we can make the strategy live in a month or so. We wanted to try something new on the blog. Introducing a new strategy for the public to learn and follow made sense. Hopefully, we can educate you on the advantages/disadvantages of the strategy over the next month or so.

After selling our new November positions, our delta is 198.44. This is a bit higher than we like. Remember we hold 5 LEAP positions, leaving the strategy long one LEAP contract. This allows us to make adjustments if necessary.

Now what of the underlying SPY contniues the recent trend lower. Well, what we typically wait for is a move ranging from 6-8% move up/down away from our strikes held, in our case 150,151,and 152. That would mean that the S&P would have to move to the low 140’s before we need to make any adjustments. If our timing models call for a intermediate-term bearsih period, which is basically a move below the 200-day moving average plus a couple other indicators we follow, we could adjust the strategy to be delta negative or at least cloer to delta neutral. As we stated earlier we are currently long delta so we are slightly exposed to downside price action.

Remember, the key is theta or time decay. As long as the underlying SPY does not move to the 125-130 level, which would force us to adjust our LEAPS, the strategy should prosper. However, sharp moves like today, or whipsaw effects, can often be detrimental to the strategy. For the strategies sake and for educational purposes, I would like to see the S&P move lower throughout the next expiration period so that you get to see firsthand how the strategy reacts. As always I will be covering the strategy in more detail in the Expiration Report (out early Sunday, for subscribers only).

The price action moved most of the indices we follow into a “very oversold” state, just what we wanted. In most cases, the risk/reward is high for a short-term bounce higher and given the seasonal tendencies we mentioned yesterday (trading day after October expiration higher over the last 10 years) we could see just that. However, holding over the weekend is not something anyone wants to do (at least by looking at the tape at the closing bell).

We will establish another Iron Condor position in the strategy early next week so if you wish to get in make sure that you sign-up before Sunday evening. Remember space is limited. With the VIX spiking higher Friday we should be able to increase our range from an already wide 200 points to possibly 260. We want to let the probability of the trade work for us so we will most likely go after a 6%-8% gain over the next four weeks. We wil ltalk about this further in the Expiration Report.

There is just so much to talk about tonight, I could write volumes, but I think my subscribers should be privy to that info so I will save my thoughts. As always please do not hesitate to email me with any questions about the new LEAPS strategy or anything options-related. I will try to do my best to answer accordingly.

Overbought/Oversold for October 18, 2007

S&P (SPY) - 16.5 (very oversold)

Russell 2000 (IWM) - 16.8 (very oversold)

Dow (DIA) - 12.5 (very oversold)

Nasdaq 100 (QQQQ) - 38.8 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Nearing Oversold. Will We Get There?

October 18, 2007

Three out of the four major indices are bordering on oversold. However, the tech-heavy Nasdaq 100 (QQQQ) conntiues to push higher and is now at the opposite extreme of the other major indices as it is bordering on an overbought state.

One note of interest, around this time I usually discuss the post-expiration bearishness that typically occurs the first two trading days following options expiration. Well, not this time. OVer the last 10 years, the trading day following October options expiration has been higher 10 out of 10. Wow! A push into oversold territory coupled with the aforementioned seasonal tendency could present a nice risk/reward setup.

Over the last few months I have been battling with bouts of frustration, particularly in the ETF Extremes strategy. We have had several close calls, as many who read this blog know, but to no avail. The win ratio and cumulative totals speak for themselves so it is unwise to alter the strategy. Remember, this is not “THE” strategy. What I mean by this is that the strategy, while extremely successful, should be looked at as another strategy to diversify your overall portfolio. Like any strategy it has its pros and cons and at this point the only con that we can think of is the recent lack of signals. Again, this is why we diversify our options strategies, so that we can take advantage of various market conditions. Directional strategies, non-directional strategies, and volatility strategies should always be considered when creating a well-diversified basket of options strategies.

That being said we continue to wait for a better risk/reward setup in the ETF Extremes strategy . A move into oversold territory will definitely push the strategy closer to a signal.

Our Iron Condor strategy has reaped its second straight month of gains. Position sizing is a key factor in this strategy. When you have a high-probability strategy , like how we implement the Iron Condor, you can expect to have a very high win-ratio. It is during the periods of inevitable losses that allow you to make gains in an Iron Condor strategy on an annual basis. After integrating a few changes, mostly adjustment guidelines, the future of our Iron Condor strategy looks bright.

Once again, we decided to hold onto our short positions in the SPY Diagonal LEAPS strategy. By waiting until tomorrow, when we absolutely have to adjust, we have basically squeezed out all of the theta. OF course we will inform you of all the rollover details tomorrow.The strategy has had a wonderful first expiration cycle. As it stands the first four weeks have witnessed a gain $1,225.50 or 6.1% in our test account. A great first expiration cycle to say the least. We will have a thorough discussion in this weekends Expiration Report (subscribers only). Stay tuned.

Overbought/Oversold for October 18, 2007

S&P (SPY) - 36.9 (neutral)

Russell 2000 (IWM) - 39.1 (neutral)

Dow (DIA) - 32.6 (neutral)

Nasdaq 100 (QQQQ) - 68.5 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

Market Vacillates Wildly/Will Short-Term Bulls Step In?

October 17, 2007

The market vacillated wildly today which is not out of the ordinary given that it is the week of options expiration. The market gapped substantially higher at the open and then proceeded to decline lower throughout the day until the upside gap was closed. Once the gap closed the market settled down and began another upwards push. By the close the broad market S&P (SPY) and tech heavy Nasdaq 100 (QQQQ) were able to sustain gains of +0.3% and +64.7%. As a result, the indices that we follow remain in an neutral state.

According to the next two days the Stock Trader’s Almanac, the next two trading days are seasonally bullish with the S&P finishing higher 71.4% and 66.7%, respectively.

As I have stated numerous times over the last few days I would like to see the bears rear their ugly heads, if only temporarily, and push the market into an oversold state. This would certainly bring in some short-term bulls and make for a high risk/reward setup. The S&P has not witnesses an oversold reading since 8/15/07.

We still have some time decay left in the short positions of our New SPY Diagonal LEAPS strategy. With only two days left we will need to roll our short October positions most likely tomorrow. All three short positions are in-the-money (SPY Oct. 151, 152 and 154) so unless the underlying SPY moves substantially lower tomorrow we are better off rolling our short positions tomorrow. We thought we would roll today but theta (time decay) is still quite high in a few of our short positions so holding on to them and allowing time decay to work in our favor is the best option (no pun intended).

Most likely we will roll our positions towards the late afternonn tomorrow. Of course if the market presents better opportunities for us to roll then we will take advantage of the situation. As we have stated for roughly a week now stay tuned as we will give the guidelines for rolling positions over in the SPY Diagonal LEAPS strategy.

Overbought/Oversold for October 17, 2007

S&P (SPY) - 42.7 (neutral)

Russell 2000 (IWM) - 40.8 (neutral)

Dow (DIA) - 36.9 (neutral)

Nasdaq 100 (QQQQ) - 64.7 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

October has been kind to all of our options strategies

October 16, 2007

The overall market has not quite reached an oversold state and by the looks of it I am not so sure that it will. After the closing bell some of the closely watched tech giants came out with postive earnings reports which have led to a substantial push higher in futures. If this holds we could see the typical mid-week, options expiration, positive bias.

Going back two years, the S&P (SPY) has a bullish bias during the week of options expiration, particularly if you only include the trading days of Wednesday, Thursday and Friday. As I mentioned a few posts ago, 10 out the last 12 expiration have finished on the positive side of things. While the market has some catching up to do if it wishes to contniue the bullish trend, my guess is that the short-term lows have possibly been established this week.

Again, our Iron Condor strategy, barring a major advance/decline over the next two days will be profitbale again this expiration cycle with roughly a 8% gain over the last four weeks. Furthermore, our New SPY Diagonal Leaps Strategy continues to move higher as theta has officially taken over with a reading of $44. Time decay combined with the upside push over the last four weeks has allowed the strategy to reap a gain of $1241.50 or 6.2%. This is certainly a wonderful beginning to a long-term strategy.

Tomorrow we will roll our short positions into November so you should be sure not to miss how this is performed as it is an intergral part of the strategy.

Overbought/Oversold for October 16, 2007

S&P (SPY) - 35.9 (neutral)

Russell 2000 (IWM) - 35.1 (neutral)

Dow (DIA) - 36.9 (neutral)

Nasdaq 100 (QQQQ) - 51.3 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·

The week of options expiration is upon us

October 15, 2007

Options expiration is upon us and as it stands all of our strategies, including our new SPY Diagonal LEAPS strategy, should finish up the cycle doing quite well.

We still need to roll our October SPY short positions to November and will most likely do that over the next day or two. As I have stated numerous times over the past few weeks this is probably the most important aspect of the strategy so stay tuned to see how we negotiate the rollover. Theta has really kicked in as it is up to $44 a day. So far the strategy has made $1,194 or 6.0% over the last four weeks. We are very encouraged by the prospects of this strategy and how it allows us just another way to diversify our stock options strategies.

Tomorrow brings “tech Tuesday”. If Wall Street takes the earnings as bearish then we could see a push lower and a move into oversold territory. This would be the first oversold reading in two months and quite possibly the first signal in our ETF Extremes strategy.

As for our SPX Iron Condor strategy, barring a major move, the strategy should be profitable for the second straight month. A few more months like this and we are back in the positive.

Overbought/Oversold for October 15, 2007

S&P (SPY) - 47.8 (neutral)

Russell 2000 (IWM) - 45.7 (neutral)

Dow (DIA) - 46.5 (neutral)

Nasdaq 100 (QQQQ) - 57.8 (neutral)

Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com

Filed Under SPY LEAPS Strategy ·