Tuesday, September 29, 2015

Short Term Option Profit Opportunity in SPY - Brief Rebound Likely Within the Next Week



Today I ran a scan for the following conditions going back to 1995:
  • SPY closes down more than 2.25%
  • SPY gapped down at the open
  • Daily and Weekly MACD are in the down position

This describes Monday session.  If we add the condition that the next day gaps up, then the results are even stronger.

But this shows a very profitable short term option play by buying 1-2 weeks of time on the ATM option and setting a limit exit order at 40%.  The Kelly Bet fraction is very high at nearly 60%.  The win rate is very high at about 88% over the last 20 years.  This data is based on a model of option prices with some reasonable and maybe slightly conservative assumptions built in.  But the data shows a positive short term gain in the equities over the next 1-2 weeks.  And the average max gain over the next week is 4.7% in the equity and 6.2% over the next 2 weeks.

So the odds suggest high volatility, with a strong chance of at least a brief rebound which would produce a profit within the next 5 days.

I have an order a little below the market to buy the Oct 9 calls at the 189 strike price.  Then the limit order would be 40% to exit.  


Pete

3 comments:

  1. I got filled on the 189 Strike Oct 9th expiration weekly calls on SPY. The entry price was 2.92.

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  2. From a further analysis of data after the close, which was slightly positive today, it seems that the ability of the market to hold up today and close positive has historically indicated an even greater chance of a short term rally. Also the stats suggest that the closest fit scenarios would lead to an optimal limit order of 70% gain on a 2 week option purchase, or 140% gain on a 1 week purchase. So it may be sensible to scale the limit exit on this trade at 40%, 70%, 140% in roughly 1/3 portions.

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  3. Monday also was the 5th day closing down in a row which has historically led to strong short term skews to the upside. The average close 3-5 days ahead of the signal day was quite positive on these scans. So that would suggest that we may see the bulk of a potential rebound occur during this week or by Monday. The closest fit occurrences showed that the sharpest rebound occurred within 3 days.

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