Wednesday, November 2, 2016

Bullish Short Term Option Trade 11-2-16

As mentioned earlier today, my outlook is still intermediate term bearish on stocks, and several of the studies I have ran over the last few weeks support that outlook.

However, today's price action significantly shifted the skew toward the bullish side for the short term - basically 1 week out.  So I ran a number of different scans looking at price and real money sentiment measures I track, and the balance was somewhere from mildly to markedly bullish for the next week or so.

A couple factors which seemed technically significant center around bollinger bands and the number of closes below the open in a row.  There are 5 closes in a row below the open for SPY and 7 in a row for the Nasdaq 100.

I ran a scan with the following criteria on SPY:

  • Gap down
  • Close below the open
  • Open below the lower bollinger band
  • 2 closes in a row below the lower bollinger band
So this scan criteria was met today/Wednesday.  There were only 19 instances going back 21 years in SPY.  Out of the 19, 15 of them made a maximum gain of 1.4% or more over the coming 5 trading days.  So that would be about 3 points in the SPY etf currently.  14 out of the 19 closed higher 3 trading days later.  The average of all 19 instances showed a 1.79% gain at the close 3 days later which was the peak average closing return over the next few weeks.

Now as of the closing values SPY did not officially open below the bollinger band.  It was a few cents above.  But the idea is that this is strong downside trading which has led to reactionary rallies in the past.

I also ran a scan which occurred today where:
  • SPY closed below the open 5 days in a row (not more or less)
  • SPY closed below the lower bollinger band
There were only 12 instances going back 21 years.  11 out of the 12 made option gains of 50% or more if buying a 1 week until expiration ATM call on the close of the trigger day/today.  The average closing gains at 6 and 8 days ahead were over 2.5%.

So these kind of lopsided bullish studies indicate that SPY could very well put in a little rally here.  I did look at other indicator combination that were not so lopsidedly bullish, but in general the backtests and technical picture indicates the upside gains over the next week are likely to be more than the downside risk.

I would guess stocks will chop or rally a bit prior to the election day next week.

Considering the overall context, I would be looking for a bearish set up by next week if the markets do rally a bit.

I also exited my SPXU position near the close today for about a 5% gain.  

So today near the close I made a purchase of a 210 SPY call option which expires next Wednesday.  I have a 50% limit gain order GTC to exit or it will likely expire worthless.

I also am still holding a Nov 18th expiration 214 SPY put.  It has some small gains currently, And I plan to hold until expiration or 100% gain.


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