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As of Monday, SPY had closed below the lower Bollinger Band for 4 days in a row. This is a rare occurrence. And it has closed below the lower band for 5 out of the last 6 days.
This set up is one of the strongest I have ever filtered for in terms of short term skew towards the upside. The stats above show about a 4:1 greater MAX gain to MAX loss over the next 3 days.
That being said, as today is indicating a gap up, some of that potential gain is gone if buying at the open. However, gap ups after these signals, on average, lead to further gains from the open.
So while we have had some other signals in the past week which have often led to short term rebounds, and this time the sell off continued, the indication here is that some reversion to the mean is likely to occur in terms of trading systems.
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This little table shows dates on an amalgamation of filtered signals that I have noted to have positive short term skews in the past. There will be a number of duplicates that are not removed in this sample, but the indication is clear.
There is over a 90% probability of a higher close than the signal day within the next 5 days. And nearly a 2% expected value if buying at the close of the signal day, and exiting at the first profitable close in the next 5 days, or just exiting at the close 5 days later if not.
I like this type of strategy for directional option trading. There is high probability of success, the expiration date is clear, and no stop needs to be used (depending on how deep ITM the option is and your risk strategy).
Because volatility is high and much of the option value can be sucked out if trading close to the money, some ideas are to trade deep ITM (like >0.90 delta), or to buy an option with 2 weeks until expiration, but keep the same exit strategy within 5 days. That way, not all the time value will get sucked out even if the exit doesn't come for 5 days.
