August 22, 2017

Mr. Probability

Once again Mr. Probability was on our side. As expected the market took a bit of a breather today. The market gapped up today and then traded in a tight, sideways manner before investors locked in gains at record highs and consequently pushed the market lower.

The gap up on 10/4 came close to filling today, but the S&P (SPY) managed to hold off the late day decline and bounce higher into the close.

I am still on the sidelines (at least in my short-term trading) looking for a good risk/reward trade. As I have reported numerous times that while shorting “overbought”, preferably “very overbought” measures are often difficult to gage because markets can remain in an overbought state for days and sometimes weeks.

I did a study, available on the Insider’s page of the website and in the White Paper, regarding fading extremes in the market and the rate of success with overbought versus oversold measures.

Oversold measures had a much higher rate of success. We have not seen an oversold reading in the S&P (SPY) since 8/15 which was the last time we tried to establish a trade in the ETF Extremes strategy. Unfortunately, we were unable to get a fill at that time which sometimes happens in the fast-moving world of options trading. But as I always say opportunities are made up easier than losses. Believe me, I would love to see a move into oversold territory. 

As for our other strategies, the SPY Diagonal LEAPS strategy continues to make strides. I am not sure when the last time we witnessed a loss on a daily basis. It is often not advised to fret over this strategy on a day-to-day basis. Only when we see sharp moves like today do we want to make sure we are paying close attention to our positions and how they are reacting to the price action. Theta continues to work in our favor. Even with the underlying SPY losing $.75, the strategy gained $31.50 for a total of $1,066.50 or 5.3%. So far we have accomplished our goal of making 3% to 5% a month.

Theta has officially kicked in. The strategy had an overall theta reading (adding together theta of all positions in the strategy) of $16 yesterday and at today’s close the overall theta was $32.54.

As I have reported over the last few days, we will need to roll our October short positions into November over the next few days. This is probably the most important guideline to the strategy so stay tuned. I will give you all the details.

Our Iron Condor position looks very good for the October expiration cycle. With a range of 200 points we are safely within our range. The underlying SPX would have to move 4.9% to the upside and 8.0% to the downside before we are in jeopardy of taking a loss.

We still have alot of ground to make up since our two losses but we are in it for the long haul so, as always patience is key. We have altered our guidelines to minimize losses and we think our approach of choosing large ranges, allowing us to make around 7-10% during an expiration cycle (4 to 5 weeks) as long as the VIX remains above 15 should prove to be successful. Of course, only time will tell. When we took our first bg loss back in April we had a range of 100 points. Now our chosen range is double that. The downside is that we are bringing in less premium, but we will take that anyday knowing that the probability of success is in our favor.

Overbought/Oversold for October 11, 2007

S&P (SPY) – 58.4 (neutral)

Russell 2000 (IWM) – 52.8 (neutral)

Dow (DIA) – 51.7 (neutral)

Nasdaq 100 (QQQQ) – 53.7 (neutral)

Subscribers please check the Insiders’ page of the website if you wish to check the overbought/oversold levels of the following 22 ETF’s: OIH, XLF, XLE, XLY, XLK, XLV, XLB, XLI, XLP, TTH, XLU, GLD, FXI, ILF, EZU, EWA, INP, UNG, DBA, DBB, DBE, and DBP on a daily basis. (not published the week of Oct. 8-12)

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Andrew Crowder, Chief Investment Strategist,