August 22, 2017

How did options strategies react to the plunge today?

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,