Monday, November 7, 2016

My Trade Idea For This Set Up 11-7-16

Based upon the analysis provided earlier today, for my personal situation I feel the best way to make a play here is to go with a deep in-the-money put option rather than an inverse leveraged ETF.  This way I can still get an option and size my position so that in the worst case scenario I lose the whole option value, it still falls at about 1/2 the Kelly bet % which the back test on this large VIX decline produces.  Now with a deep in the money option and the tendency for volatility to shrink on market rises, it seems very unlikely that a 220 or higher strike put on SPY (expiring in 2-3 weeks) would be likely to lose all of its value with price rising and staying above 220 at expiration 2-3 weeks.  That would take another 4% gain or with a back test that is strongly negative and the market rising into resistance at the 213-216 levels.

So I currently have an order for a 224 strike put on SPY which expires Dec 9th.  Based upon some cycle analysis and time relations of recent moves up and down, I would expect price to continue to decline through November expiration or beyond.  And that matches with the recent back tests I showed this morning as well as with some which showed up a few weeks back suggesting weakness for a couple months (November in this case).  I am looking to enter the option at 11.00 which would take a push to basically 213 on SPY.

For those that may think that it would be better to wait until the election is done and the results are know or that there may be some big rally on the news, understand that market are constantly factoring all this into price.  In past instances there were significant corresponding upcoming news in interest rates, elections, bailouts, etc, etc.  And the stats are what they are.

Personally, my feeling is what outcome could be significantly unexpected (not factored into current prices) which the market would rally hard on?  I don't know.  But if a candidate wins that the market is not expecting, I could easily see a short term reactionary sell off.

So for me, the position sizing far out of the money, coupled with the objective past stats (which are not all encompassing, but good enough for me to make clear decisions) suggesting this type of rally is often a very short term pop, factors in the possibility of upside surprise and worst case scenario but still gives a leveraged position that can profit from what seems the most likely scenario.

Let me know if there is any question on this analysis.


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