Monday, September 26, 2016

New Put Option Trade - Stocks Could Decline Dramatically The Next 1-2 Weeks

Click on Table to Enlarge

The table here shows the results of the following back test criteria:

  • daily MACD crosses down today
  • daily 14,3 stochastics crosses down today from above 50
  • weekly MACD is in the down position (fast line below slow line)
A relatively simple scan, but shows the impact of a market that is having shorter term technical sell signals with the larger current pointing down.

Four trading days later all 8 instances closes lower.  The minimum was 0.5% and the maximum was over 10%.  But looking at the MAX gains versus loss over the coming days and weeks, I rarely see anything this strong. 

The instances are not that high, but I don't think that means this sample is insignificant.  Some studies are rare, with small sample size, but are obviously notable events.

I purchased both a 214 strike Nov 18th expiration put as well as a 214 strike Oct 7th expiration put.  Based on the stats, this Friday's expiration certainly could be used as well.  The stats are about par with the 2 week stats as far as option % returns expected.

In this case, the past instances suggest a limit order of 160% gain on the put option would produce a very high expected value and win rate.  While the sample size is small, I am going ahead and placing that limit order.

I am going to wait for a couple days before placing the limit order for the Nov put.  I think the 199 level on SPY could be broken by November.

Trade Idea:
Buy the SPY Oct 7th expiration 213 strike put at the open tomorrow.

Additionally, a short/inverse trade could be entered here.  Using a 7.75% limit gain order and stop loss order (can enter as an OCO if available), would produce the maximum expected value based on the past test.


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