Monday, January 9, 2017

Bearish Trade Stats From Recent Set Up

Click to Enlarge Stats

On December 9th and December 13th a trade set up triggered which has had a consistent and marked bearish skew looking ahead a couple months or more.  I did not remark on it at the time because the technical analysis was pretty clear to me that any immediate pullback was likely to be modest and that further bearish divergence would likely develop.

However, I will now make not that this set up is active and still in a range where it could be acted on,

The scan is as follows:
  • daily MACD position is UP
  • daily MACD lines are both above 0
  • SPY closes up for the day
  • there is a total put/call "sell" signal (5 day average is below 1 st dev bollinger band)
I removed subsequent readings from clusters with multiple signals after the first in a 2 week period.

The stats above are for an ATM put option with 2 months until expiration if purchased at the signal, in this case on Dec 9th.  Past instances show peak expected value at 120% gain on the option, but the 90% gain mark puts the win rate at 67% with only a slightly lower expected value.  So that is the stat shown here.  The stats are nice here, and would suggest that a 226 to 228 strike SPY put could be purchased with a standard february expiration, and then set a limit order of 90% gain to exit.  There would be about 2/3 chance of winning based on the stats, and the expected value is around 26%.

Click to Enlarge Stats

In this case, the equity stats have a strong skew and a nice trade set up as well.  Using the simple methodology I have designed for trading these situations, you enter inverse on the set-up and then set and equal percent stop loss and limit gain order.  If neither are hit (which is MOST common) you exit the trade a predetermined time.  In this case it is a 2 month time exit from the initial entry, which would be Feb 9th.  

The stats shown above would be for a short of SPY and then use a 6.25% limit gain and stop loss or exit Feb 9th.  Basis the SPY etf the expected value would be about 2.25%.  But the stats justify 3x leverage.  And so the theoretical stats there would be about 6.75% expected value.  That is pretty nice for an "equity" play when the market is anticipated to fall.

In this case in you buy a 3x inverse etf like SPXU then the stop would have to be 18.75% away from the entry and the limit order the same.

So these stats are certainly actionable by my criteria for trading.  And I also looked at times when there was a put/call "sell" signal at a new 52 week high, which also was the case in December.  And there was a bearish skew looking out 2 months, which also showed profitable stats using a limit order of 140% gain on the ATM put option.  I simply note this to say that even though stocks are at all time highs, the signal here still seems to be legit.  

And now that some time has burned away and some divergence has developed in the technical analysis, I think there is higher chance of stocks moving down with minimal time decay on the options.  In fact the option price is lower now than at that point, and so the value may be better.

That being said, I think it is likely that SPY could move higher for a couple more days to create an hourly time frame bearish divergence.  If so, that could be a fine tuned entry point.  I have a limit order to enter a position based on a move up to the 228 region in SPY.


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