August 17, 2017

Sell In May Revisited and Indices In A Very Oversold State

Before I delve into the options strategies we follow and how the performed during the October cycle I would like to  touch on a post that I write back in late April/early May of this year.

On 5/3  I first spoke about the old Wall Street adage “Sell in May and go away. As many of my loyal readers know, I mentioned it several more times over the course of the next few months.

On 5/4, when the market officially moves into the aforementioned adage, the S&P (SPY) was trading at $150.75. Today the S&P (SPY), closed at $149.67 lower -$1.08 or -0.7% since the “sell in May” period began. Once again, the seasonally flat period between May-October proves it merit.

Okay, back to today’s market action. Whew! More than a handful of options strategists were hurt by today’s price action. Our strategies actually had a wonderful expiration period. Our Iron Condor strategyamde 7.9%, the ETF Extremes held flat (no signals), and the New SPY Diagonal LEAPS strategy finished today (after rolling our short positions into November) up $670 or 3.4% for the October expiration cycle. Today’s move certainly made its mark on the strategy, but when the S&P falls sharply, we should expect to see losses.

As I mentioned above we rolled our short positions this afternoon. We made the following trades:

Sell to open 1 SPY Nov07 151 calls

Buy to close 1 SPY Oct07 151 calls for a credit of $2.86 or $286 (calendar spread)

Sell to open 1 SPY Nov07 151 calls

Buy to close 1 SPY Oct07 152 calls for a credit of $3.58 or $358

Sell to open 1 SPY Nov07 152 calls

Buy to close 1 SPY Oct07 152 calls for a credit of  $2.96 or $296

Sell to open 1 SPY Nov07 150 calls

Buy to close 1 SPY Oct07 154 calls for $4.48 or $448

Again, our hope is that after we educate you on how this strategy works we can make the strategy live in a month or so. We wanted to try something new on the blog. Introducing a new strategy for the public to learn and follow made sense.  Hopefully, we can educate you on the advantages/disadvantages of the strategy over the next month or so.

After selling our new November positions, our delta is 198.44. This is a bit higher than we like. Remember we hold 5 LEAP positions, leaving the strategy long one LEAP contract. This allows us to make adjustments if necessary.

Now what of the underlying SPY contniues the recent trend lower. Well, what we typically wait for is a move ranging from 6-8% move up/down away from our strikes held, in our case 150,151,and 152. That would mean that the S&P would have to move to the low 140’s before we need to make any adjustments. If our timing models call for a intermediate-term bearsih period, which is basically a move below the 200-day moving average plus a couple other indicators we follow, we could adjust the strategy to be delta negative or at least cloer to delta neutral. As we stated earlier we are currently long delta so we are slightly exposed to downside price action.

Remember, the key is theta or time decay. As long as the underlying SPY does not move to the 125-130 level, which would force us to adjust our LEAPS, the strategy should prosper. However, sharp moves like today, or whipsaw effects, can often be detrimental to the strategy. For the strategies sake and for educational purposes, I would like to see the S&P move lower throughout the next expiration period so that you get to see firsthand how the strategy reacts. As always I will be covering the strategy in more detail in the Expiration Report (out early Sunday, for subscribers only).

The price action moved most of the indices we follow into a “very oversold” state, just what we wanted. In most cases, the risk/reward is high for a short-term bounce higher and given the seasonal tendencies we mentioned yesterday (trading day after October expiration higher over the last 10 years) we could see just that. However, holding over the weekend is not something anyone wants to do (at least by looking at the tape at the closing bell).

We will establish another Iron Condor position in the strategy early next week so if you wish to get in make sure that you sign-up before Sunday evening. Remember space is limited. With the VIX spiking higher Friday we should be able to increase our range from an already wide 200 points to possibly 260. We want to let the probability of the trade work for us so we will most likely go after a 6%-8% gain over the next four weeks. We wil ltalk about this further in the Expiration Report.

There is just so much to talk about tonight, I could write volumes, but I think my subscribers should be privy to that info so I will save my thoughts. As always please do not hesitate to email me with any questions about the new LEAPS strategy or anything options-related. I will try to do my best to answer accordingly.

Overbought/Oversold for October 18, 2007

S&P (SPY) – 16.5 (very oversold)

Russell 2000 (IWM) – 16.8 (very oversold)

Dow (DIA) – 12.5 (very oversold)

Nasdaq 100 (QQQQ) – 38.8 (neutral)

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Andrew Crowder, Chief Investment Strategist,