June 23, 2017

It’s All About the New Year’s Gap. Will it Close? If so, When?

The small caps,  as seen by the Russell 2000 ETF (NYSE:IWM), remain the most resilient of all sectors within the market. The Dow (DIA), S&P 500 (SPY) and Nasdaq 100 (QQQ) have pushed back into neutral states.

Since the upside gap on 1/2 the major benchmarks have struggled to advance. The large gap underneath seems to be weighing on the market which makes me more apt to lean towards the bearish side until the gap is resolved.

Of course, as we all know we could see another push towards the upside, but again, with out-of-the-money credit spreads I can create a margin for error that allows me to be absolutely wrong in my assumption, yet still profit from on the trade. It all comes down to probabilities. If we are able to go out to the 80% probability of success (.20 delta) we can create a nice buffer, especially when you think that we are applying the strategy to an underlying that has already moved into an extreme overbought/oversold state.

Oil is currently on my radar, more specifically USO. The ETF has pushed significantly higher over the past month and now it is in an overbought to very overbought state across every time frame I monitor. Tomorrow I will discuss how I might approach a trad in USO for the February expiration cycle using one of my high-probability strategies. Stay tuned!

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