Tuesday, June 28, 2016

Major Flip Flop In Strategy Based on Today's Action in SPY

Today the VIX dropped over 20%.  This has only happened 9 other times going back to September 1995.  The forward results showed a very strong negative skew even in the short term of 3 days.  That was slightly lopsided by a couple massive downers in October 2008, but looking ahead 2 weeks, 7 out of the 9 showed greater max losses than max gains.

So the point here is that we have the conflicting study from the last couple days, which suggested a rebound (which we saw already in some significant measure today) that may last several days.  And now we have information suggesting that there is risk of immediate downside with 6 out of 9 instances closing lower 3 days ahead.

So if a call option was established with the expiration at this weekend, my current recommendation would be to exit ASAP, like at the open tomorrow.

I may provide stats on a possible put option trade if the rebound extends further from this level.


Monday, June 27, 2016

Backtests From Many Angles Suggest Probability of a Rebound Over the Next 4-5 Days

I have spent some significant time over the last couple days performing scans comparing the current market status to the past history in SPY.  And from a number of different angles the stage appears set for a rebound in stocks.

The backtests have pretty consistently shown the 4-5 day forward time frame as having the most notable strength.  So there are bullish plays here in both SPY options and the equity ETFs.

Now longer term, the results of the scans were not as consistent looking ahead 1-3 months.

My personal assessment from the technical side is that stocks still will fall a significant amount in the coming months.  So the expectation may be for a short multi day rebound which will punctuate a continuing decline, and also may offer an opportunity to enter a bearish position on the rebound.

The backtests which I have run suggest that if SPY gaps down tomorrow, buying an ATM call option with the expiration at the end of the week would likely be a profitable play.

If there are any questions on specific ways to play this let me know.


Aug SPY 212 Put Limit Order Final Exit Acheived

The SPY 212 August expiration put which was entered at around 5.15 earlier this month, has now moved up in value beyond its 130% limit order which was the highest value given (at entry) as a possible exit limit dependent on position sizing.

So that trade is now closed.  The equity portion of the trade has not quite achieved a 6.75% loss in SPY yet relative to the entry through another 1% decline would fulfill that limit order.  It seems there is a high probability of that occurring.

The market is now set-up for a short term rebound and bullish play, I may offer some further stats on this later today or over the next few days as things unfold.


Friday, June 24, 2016

Big Gap Downs Most Often Lead to Rebounds In The Coming Week

I will provide more stats after we see the close today, but with the big 3% gap down in SPY, a set-up is definitely in play for a rebound into next week.  The backtest stats are good for both equity and option plays with expiration ending next Friday or exiting the equity trade next Friday.

So this is a heads up that a position may be taken before the close today.  If there are immediate questions regarding possible positions, let me know ASAP to do some further back testing prior to the close today.


Wednesday, June 22, 2016

VIX Increases With Elevated Put/Call Ratios

I ran a scan today looking back at times when the VIX increased more than 12% and at the same time, the total put/call ratio was greater than 1.05.

This back test resulted in a significant bullish skew in the SPY options over the upcoming 1-2 weeks.

When I added the condition of VIX/VXV being greater than or equal to 1.0, the results were even more outstandingly bullish.  The results were not much different for bear market versus bull market moving average configurations.

So the implication here is that the market may rebound after the Brexit announcement.

Buying an at the money SPY option with 1 or 2 weeks until expiration, and using limit exit orders of 40%, 60%, or 80% to exit while letting losers expire worthless all led to positive expected values.  Since there are only 2 sessions left this week, I would suggest buying the July 1st SPY 208 call and using the 40% limit gain order would be an appropriate trade.

If further details are needed regarding position sizing, etc, let me know.


Thursday, June 16, 2016

Rebound Suggested After the Open Today in SPY

In follow up to the information I posted yesterday, going back to late 1995 there were 44 instances where there were specifically 5 closes down in a row.  And only 12 of them showed a gap down the following day.  But the average open to close return on that day (today in our case) was 1.2% which is huge for these types of stats.

Now our environment is lower volatility, and I don't really expect to see that kind of a gain, but the suggestion here is that things are likely overdone in the short term, and multiday rebound is likely.

The 12 instances with gap downs showed about 2.25% return in SPY over the next 5-6 trading days.
Again our volatility is a little lower than others in this batch, but it makes sense that we could see a rebound into next week.


Wednesday, June 15, 2016

5 Days Down in a Row for SPY ETF 6-15-16

SPY closed down for the 5th day in a row today.  Yet the sell off has been mild.

I ran a scan looking back at time when

  • SPY closed down for the 5th day in a row (not more or less)
  • VIX high for the day was less than 30, indicating only moderate volatility
And the results had a notable bullish skew for the next 5 days.  The best option profit opportunity was to buy an ATM call option with 1 week until expiration and set a limit order of 140% gain or let it expire worthless.

So, there are 7 days until the expiration next Friday.  But most of the gains came in the first 5 days in past instances.  So the way my model is constructed I would guess that the 140% gain would be a little too high to be realistic, but possibly 80-100% would be more realistic.

In any case, this set-up add further confirmation to the idea that a short term bullish rebound will likely occur into this weekend or beyond.

The strongest skew in the future equity returns occurred in the first 3 days, where the MAX gain was about 1.85 times the MAX loss.  So there is a profit opportunity in an equal magnitude stop loss order and limit gain order.

If there are any specific questions on this let me know.