June 29, 2017

High-Probability, Mean-Reversion Strategy – Major Benchmarks Reach Short-Term Extreme

The S&P 500 (SPY) has pushed 11% higher since its low set last Tuesday. It has indeed been a “rip your face off” type of rally with many bears left for dead.

I added two more positions today: one in the High-Probability, Mean-Reversion Strategy and one in the Theta Driver Options Strategy. The latter certainly looks to be in much better shape at the moment, but I believe we will witness a decent pullback over the coming days.

Why?

As I said before, the major benchmarks are currently in a short-term overbought state, but now all of them what has been strong overhead resistance. Furthermore, we had a very large gap today in all of the major indices that went unclosed. Combine the three and the risk/reward leans heavily towards a short-term decline.

If that wasn’t enough Jason Goepfert came out with an interesting statistic the other day: “Options traders don’t seem to be buying into the rally.  Despite at least +1% gains in the S&P 500 each of the past 3 days, there have been more puts than calls traded on the Chicago Board Options Exchange. This has only happened twice before, on 8/8/07 and 9/15/11.  Curiously, both times the S&P lost at least -6% during the next week.”

I am currently short two underlyings in my High-Probability, Mean-Reversion Options Strategy so I expect to see a short-term reversal over the next few days. Once the gap closes from today I expect that I will need to reevaluate both positions as I should have a decent profit in the combined positions.

As for the Theta Driver strategy, I currently have one position that I will let expire worthless (made over 12.5%) which makes for the second straight months of gains. As I stated before, I made another trade in the strategy today and I was able to go out over 10% to the upside for another 12.5% gain if the underlying closes below my chosen short strike price.