Thursday, September 3, 2015

SPY Call Option Follow Up - Exit Plans

The suggested ATM SPY call options from earlier this week should be entering the exit zone today.

So based on the stats we looked at, setting a 40% limit order should be a very high probability of success trade.  That limit order looks like it will hit this morning.

I had suggested using a 70% limit order to exit the trade.  If price moves up a little further into the gap down from 198ish, that order will likely hit.  So, I don't have anything new to offer other than possibly suggesting a scaled exit taking part of the position off at 40% gain, and then using the 70% limit order for the rest of the contracts.


Pete

Tuesday, September 1, 2015

SPY Call Option Limit Order Suggestion

I would suggest placing a limit order of 70% gain from today's closing value in order to exit the suggested option strategy mentioned today (Sept 11 ATM call option).

This takes into account some other criteria not shown earlier today.  For this order to fill, it would take a rally back well into the gap area from today.


Pete

Today's Action In Context - SPY Down 3% After a 2% Gap Down

Click on Stats to Enlarge

This table looks at previous instances of days when SPY gapped down 2% and then closed down greater to or equal than 3%.  Data goes back 20 years and does not include August of this year (which wouldn't change it).

What we see is consistent/profitable bullish opportunities on average.  In this case, the stats look at a 5 days hold, which is the maximum closing return on average.  77% close higher 5 days later, with the average gainer up more than 4%.  The average total expected value, including the losers, is 2.7%.

The few instances that were losers were basically in the waterfall declines preceding sharp bounces. So they still had 3-8 days before bottoming out in the short term and putting in a sharp rally.

So the stats here don't add that much to the earlier post.  If tomorrow gaps down, I would expect an even stronger stat profile, but obviously instances are getting fewer as well.

Again this is short term info in the context of a probable continuing downtrend.


Pete

SPY Gap Downs of Greater Than 2% - Short Term Bullish Option Play

Today SPY gapped down over 2%, and so I looked at other times when SPY gapped down over 2% while the weekly MACD was down.  The short term stats show a clear upside bias for about a week.  The peak closing gains in the short term were 6 days out.

Looking at the options part of the assessment, based on my pricing model, an ATM call option purchase with 2 weeks until expiration would provide the maximum value play.  The maximum expected value would be to enter the trade and set a limit order of 160% gain to exit.

Local maximum expected values occurred at 40%, 80%, and 160% limit orders.  The stats below show the overall trade stats.  Given the current market environment, I feel that the 40% or 80% limit order would be more appropriate for the market overhead resistance.

Which ever the case, they are positive EV plays, and the position sizing would vary depending on the exit limits.  The Kelly Bet % will give guidance on that.  And psychologically, an 80% win rate trade like the 40% limit order is nice in that it gives frequent wins and reinforces sticking to solid trades and planned exits.



This shows the stats for a 2 week till expiration ATM call exited with a 160% gain limit order.  This gives the maximum expectation at 30% per trade.



This shows the stats for a 2 week till expiration ATM call exited with a 80% gain limit order.  This has a higher win % at 66% but a little lower expectation.



This shows the stats for a 2 week till expiration ATM call exited with a 40% gain limit order.  This gives the maximum win rate at 80% but a lesser expected value of 12-13%.

I personally took the trade and have the 40% limit gain order in place to exit, which would happen on only a partial fill of today's gap down within the next couple trading days.



Monday, August 31, 2015

SPY Is Testing Broken Support - Resistance Is Expected Here For a Continued Downtrend

Click on Chart to Enlarge

This is a SPY daily chart showing the action for the last 1 year or so.  The red lines were the clear horizontal support levels that were established in the uptrend.  In past market tops, when support is broken, there is often a rally to move above the price levels of the bottom support level.  And that general area is the region where the best shorting opportunities have occurred.

And currently that is where SPY is situated.  From the shorter term charts (15 and 30 min) it would seem ideal for another push to a higher high for the rally today or tomorrow.

But basically the rally has run its expected course in both price and time.  I am now looking to speculate on the downside and have some put option orders which would likely fill on a push to yet higher highs above last week's high.

If the rally does stall here quickly, past similar scenarios would suggest a sharp deeper than 50% retracement of the rally which occurred from low to high.  That may be just the first attempt at a retest of the lows, and it may not last.

But tomorrow seems like the ideal topping time to me.  So my suggestion is to be totally prepped for the exact signals you look for to enter a short trade.  Also, I would advise a scaled exit on this trade.

For instance, once the trade is entered and stop placed, set a limit order to exit half the position at a profit of 0.5 units.  Then, if that is hit, move the stop down to half of its original amount.

Another similar option, is to set a half position exit at 1.0 unit (compared to stop loss amount), and then just maintain the stop until an exit signal is generated.


Pete

A Note on the VIX/VXV Ratio - Declines Probably Still to Come

Interestingly on the recent massive sell off in stocks, the VIX/VXV ratio has spiked and remained elevated above the 1.0 level which is a theoretical extreme high level.

The last time we saw a massive sell off similar to the current one was in August 2011 in which case the VIX/VXV stayed elevated above 1.0 for the waterfall decline and the initial rally off the 8-9-11 waterfall decline low into the 8-17-11 high after which a sharp couple days decline occurred and retested the low.

The VIX/VXV then remained above 1.0 until right at the peak of the following rally into August 31, 2011 where price immediately rolled over again.

So the point here, is that the current elevated VIX/VXV ratio shows fear in the market, and with price rallying hard without the ratio dropping back to more normal ranges, the stage appears still set for a volatile re-test and or break of the lows in the coming weeks.


Pete

Friday, August 28, 2015

Initial Rebound From the Waterfall Decline Likely Near Complete

Click on Chart to Enlarge

SPY has advanced basically as suggested by previous comparable instances highlighted in recent posts.  And the peak short term gain in the past instances was in the 5-7 day range on a closing basis from last Friday.  So today is day 5.  Additionally, there has been no divergence, even short term at the recent low, suggesting the psychological phase of this downward move is unlikely complete.

Looking at the 15 minute chart above, SPY has been advancing in a rising wedge type of pattern off of Monday's low.  With a poke above yesterday's high, there will be a pronounced bearish divergence on the 15 minute chart which may highlight the end of this initial reaction to the massive sell off.

From previous instances, it seems that a greater than 50% retracement of this week's rally is likely even if the bottom holds for the intermediate term.

I would again re-iterate that any long position be taken off currently in stocks.  Depending upon your time frame, and method for trading, I would suggest that some short-term downside is likely.  I think the gap up from Thursday has to be a minimum target for any short term halt to the uptrend.


Pete