July 28, 2017

Market Neutral, Condors and Diagonals

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)

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