All Entries in the "Index Option Trading Strategy" Category
Stock Market – Up or Down? Please Vote
Wow, it’s been quite the interesting ride the past few weeks. I kept hearing rumors of a market correction before the election and then a market climb as the Republicans take back the house and possibly but not likely the Senate. It’s been quite the opposite as the market continues upward hitting new highs. So has the market recovered and will it continue to climb, or will we see a significant drop (defined as 6% or greater drop in the Dow) before the end of the year? I’ve spoken to as many people predicting gloom and doom as I have people thinking we have turned the corner to recovery. The pros and cons of a continued strong stock market:
Pro’s
It’s earnings season and so far the results have been pretty good. Profits are up, guidance is for the most part more positive than negative. Unemployment is down, companies are cash rich and expectations are for a strong retail holiday season. That all sounds good huh. See, the recovery is HERE.
Cons
Not so fast, although the above is true, although profits are up, gross margins are not. The jobless rate has not come down. Companies are buying back stock or buying other companies, but they clearly are not hiring. There is talk of quantitative easing (in essence printing more money to stimulate the economy) but that is a short term fix that will cause more damage long term Not to mention the rising deficit. Need I say more.
So now it’s your turn to weigh in. Please leave a comment and let me know what side of the fence you are on and why. Your opinion matters!
Trading the VIX
The market recovered almost all the losses of yesterday on the further weakening of the dollar. As the dollar goes down, the market goes up. Its an inverse relationship that is having its effect. The dollar is down 2.63% vs the Euro year to date and down .88% vs the pound just today.
As Geithner said recently, “We can’t devalue our way to prosperity”, but isn’t that exactly what the government is doing? We continue to spend, spend, which puts downward pressure on the dollar. Interest rates are akin to zero and now we are hearing about the upcoming QE2, which will send the dollar even lower. So is this really a good thing for the stock market long term.? Clearly NO! If we don’t get spending under control we should expect to see a near collapse of the dollar.
Net net, not a good thing for the US economy and were on shaky ground as it is.
I anxiously await what’s next. I’m still expecting a significant downturn and I’m even more convinced of the inevitability of it now. So how do I intend to protect myself and make money on the downturn? I’m trading debit spread puts and I’m trading deep out of the money calls on the VIX. More on the specifics on my VIX strategy tomorrow.
Correction On the Horizon?
After today’s big stock slide, does this indicate a much anticipated correction? My personal thoughts are that we are headed for a correction, although I thought the market would hold high or continue higher until the November election. After today, perhaps we will see the market continue downward. Only time will tell. It’s earnings season, and although some of the reports have showed increased revenue growth and stronger than expected results, at the end of the day, gross margins and guidance has disappointed. I wouldn’t be surprised to see a continued downward trend. Tomorrow I will post some thought on how to make money if and I believe when a correction occurs. Stay tuned!
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A New World Order
What really is going on here? The market is on a tear, although volume continues to be low and as far as I can tell most Americans are not any better off than they were 6 months ago, in fact, I can make a case that most Americans are worse off. They fear for their jobs, or most likely fear they won’t find another job after losing the the one they had over the course of the last year. Many still fear losing their homes and if the news reports are accurate, we haven’t stemmed that bleeding yet. So what’s up? I have come to the conclusion that the market aka investors are inherently bullish and that any crumb of good news takes the market higher… Until the day that one piece of bad news comes along, and Wham! correction.
I’m a pretty conservative investor – with the exception of my last post – The Debit Spread – and I look to basic fundamentals when it comes to the market. Well over the course of the last year and a half, I’ve had to release my mental hold on the belief that the market moves based on economic fundamentals. I think the market has changed, and I think it has changed for the long haul. I totally get that although the US stock market is made up of US companies, most of the companies making up the DOW are global companies with an increasing percentage of their profit coming from overseas. I’m not referring to that, I’m referring to a market that now moves with much greater volatility on emotion. Emotion often times a result of NEWS! We seem to have gotten away from the fundamentals of how our American companies are prospering and seem to trade with what gets reported by CNBC. Now don’t get me wrong, I love CNBC, it just seems to me that the market is overly bullish without the basic fundamentals to back it up.
We are in a new era of the US stock market – low volume, electronic trading, flash crashes, and emotional trading. I’m trying to get used to the new world, adjusting my strategies along the way. Having said all that, there is one thing I’m sure of, even though the rules may have changed, there’s still money to be made!
Happy trading!
The Debit Spread
The market continues upward, breaking through what were perceived threshold limits, 10,700 on the Dow, 1130 on the S & P. Volume is low, off a full 30% from September last year. While the market moves northward and there is little talk anymore of a double dip, I still believe we are headed for a correction, downturn, whatever you want to call it. I don’t believe and never did believe we were headed for a double dip, but I still go back to my old soap box reiterating that the economic news is not good and won’t be good until jobs return. So given what I believe, how do I trade? First I’ll admit that I’m becoming quite the fan of the vertical roll. With the NDX on a holy tear, I have vertical rolled my position twice, both times to the next month and at least one strike price away. I am vertical rolling myself out of danger, and I’m very comfortable with that strategy. Most of the time I make money with the roll, one time I had to pay, but I’m very much okay with giving back some of my gain to remain safely out of the money. I’ll wait for the market to turn down and lose volatility.
The one trade that I’m experimenting with (read, it’s a gamble so don’t necessarily follow my lead!) is the debit spread. I believe the market will go down sometime in the near future – (clearly a directional trade, which I usually avoid, but in this market I’m willing to take my chances) – so I BUY a debit spread – I’m trading the S&P, a 10 point spread expecting the market to take a down turn and when it does, I sell the position for a profit. Warning!!! This only works when you are predicting the direction of the market and you are correct!! What I specifically like about this strategy, which by the way is a 360 degree turn from the iron condors I usually trade, is the cost to get into the trade is small, your losses are finite, limited to only the amount it cost you to buy into the position and your profit is huge if you call it correctly. Okay, I’m becoming a glorified gambler – and I like it.
Vertical Roll Limitations
The market is moving up, up 6 of the last 7 sessions. I have a call vertical spread position on the NDX and the strike price is moving uncomfortably close to my position so this morning I vertical rolled up and out, meaning I rolled my position further away from the current strike price and moved my position to next months options. I trade primarily the iron condor, which consists of vertical put spreads and vertical call spreads on the same index. So after executing my vertical roll to the next month, I wonder whether I would be able to complete my iron condor by getting puts in the current month. Of course the answer is no, not without additional buying power. So be aware that when you vertical roll, you will need additional buying power to complete the iron condor in current month, or if you already have puts and you want to vertical roll your calls, you are going to have to close your put position prior to vertical rolling if you don’t have additional buying power. The vertical roll is a very valuable strategy, but it has its limitations.
Happy Trading!
The Dog Days of August
I cant get my orders to fill, why, lack of volume. As expected, August is a slow month. I guess everyone is on vacation, maybe I should be as well. I place an order and it sits, this month for weeks before it finally fills. Some of my orders dont fill at all. It’s frustrating, so instead of bucking the trend, I’m going to chill, maybe the beach is a better option for today. Get it, option…..
Back in the Game
Okay, I could say I told you so, but I’m not going to do that. The market finally had that correction we’ve been talking about. Now it’s moving up again. What a wild couple of months it’s been.
I’ve been silent over the last month, for a number of reasons. I, like many I’ve talked to in recent weeks got caught in the unexpected (and as I’ve blogged, unsubstantiated) market rally and lost some money, but more importantly have found myself questioning my strategy in this volatile market. I’m back in the game with a different attitude and a more conservative strategy. I’m still trading the iron condor but I’ve diversified my strategy and have moved to a more conservative ROI expectation. I have found that in the current market, you can’t count on what has worked historically to continue to work now. The market is changing. Once upon a time the market reflected the performance of American based corporations and reacted accordingly. More and more the US stock market reflects global economic conditions and even more concerning is the market movements that are a result of electronic trading. Now I am not against electronic trading, I like other investors depend on it. But after the “flash crash”, you have to wonder, can that happen again. Going forward it one thing you can take to the bank, the market has changed and it would behoove you to recognize that and trade accordingly.
Happy Trading!
The Power of the Mastermind
One of the most beneficial hours of my work week is spent attending a Mastermind call with my fellow traders.
What is a Mastermind Group?
The concept of the Mastermind Group was formally introduced by Napoleon Hill in the early 1900′s. In his timeless classic, “Think And Grow Rich” he wrote about the Mastermind principle as:
“The coordination of knowledge and effort of two or more people, who work toward a definite purpose, in the spirit of harmony.”
He continues …
“No two minds ever come together without thereby creating a third, invisible intangible force, which may be likened to a third mind.”
In a Mastermind group, the agenda belongs to the group, and each person’s participation is key. Your peers give you feedback, help you brainstorm new possibilities, and set up accountability structures that keep you focused and on track. You will create a community of supportive colleagues who will brainstorm together to move the group to new heights.
