Sunday, September 11, 2016

SPY is Likely to Fall a Bit More Then Rebound Sharply for 1-2 Weeks - New Option Trade

The previous recommended SPY put option trade was exited on Friday for 100% gain which was the suggested limit order for the trade based on the backtests.

Friday was a notable day with a very strong sell off and close low in the range and huge volume increase.  The VIX swelled over 30%.  The total put/call ratio increased more than 20%.

The increases in the VIX and total put/call ratio themselves are not particularly bullish.  From the tests I ran, it seems to be neutral for the near term, but the risk for oversized sell offs is increased for the intermediate term looking out a couple months or more.

However, the price and volume pattern itself, is showing notable bullish skews over the next week.

A scan I ran had the following criteria:

  • SPY down 2% or more
  • SPY gaps down
  • SPY closes in the bottom 10% of the day's range
Going back o Sept 1995, there were 112 instances, which is a nice sample size.  And over the following week, 91% of those instances, showed gains in ATM call options of 50% or more.
This is a very high win rate...outstanding consistency.

So the play here would be to purchase a SPY 213 call option which expires this coming Friday, Sept. 16th.  Then set a limit order of 50% for exit.  I would use a limit of Friday's closing value in the option for entry.  The closing value was ~1.74.

Another strategy would be to set a limit order to buy the same option at 1.30, and then set a 100% limit order to exit the trade.  This is based on the fact that there is a greater than 60% chance that tomorrow will have a lower low at least 0.5% below Friday's close.

When filtering for bull or bear markets or MACD configuration, the results were not significantly different.  

If tomorrow SPY gaps up, then based on the past similar occurrences, 2/3 of the time, price will decline back to the level of the previous day's close or lower - filling the gap.  I say this in case tomorrow gaps up, it would then be sensible to place the limit order at 1.74, and use the 50% limit exit order.

I may update on the set up again in the morning as I see the futures position and probable gap direction and size.


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