Monday, July 20, 2015

Low Panic Levels Suggest Negative Skew Over Next 2 Months

Click on Charts to Enlarge

As of today's close, my complacency indicator shows a reading below 7.0.  The images above show all times in this bull market with readings below 7.0.  Of note is a consistent greater max loss than max gain on all time frames out to 5 months.  The greatest skew to the downside is at 2 months where it is about 1.6:1 in favor of downside.

Looking at the options gains for calls and puts for ATM options with 2 months until expiration, there are about 55 days which meet the criteria and the average max put option gain is about 150%. 

About 8 out of 10 of the instances showed max put gains of greater than 50%.

About 6 out of 10 of the instances showed max put gains greater than 100%.

So those stats suggest a couple obvious trading or hedging strategies by simply buying the put now, and setting the limit exit order.  Of course fine tuning could be attempted as action unfolds.

Now the 14 period Money Flow Index is also currently greater than 70.  When adding that criteria to the filtering process the 2 month max loss and gain show greater than 2.0:1 skew in favor of max loss.  And half the instances showed put gains of greater than 150%.

So I think an ideal situation here would be for some further upside leading to a divergence in the MFI and then to speculate on the puts. 

But for now, a 2 month hedge with ATM puts and a 50% limit order to exit the position seem like a solid odds play to protect for some potential downside into September.

Let me know if there are further details desired in regards to this data.


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