Posts Tagged ‘option picks’

April 21, 2011

The stock market keeps marching on. Below are 3 charts: the 1 year S&P 500 (SPX), CBOE SPX volatility Index (VIX) and VXX which is the VIX short term ETF.

As you can see in the above charts, normally  as the SPX rises the VIX, and therefore the VXX fall.

The VIX is at it’s lowest in more than 3 years (see 5 year chart below) and the VXX, being newer, is at its lowest ever.

Note what happened when the VIX went that low: It started to rise, meaning the SPX started to fall, and eventually exploded to the upside. It will happen again. When? I cannot tell you that but I can tell you that the danger level is now quite high.

For us options’ traders drastic declining VIX (volatility) means much lower premiums on options we try to sell, such as spreads, naked puts/calls and covered calls. Of course it makes it cheaper to BUY the options. However, with buying options we may be right eventually, but if we are not exactly right on the timing, no matter how cheap the options are (were), they will go down in value and eventually expire worthless.

Happy Easter everyone.

Erik Epp

Welcome! Here you’ll find education on option spreads trading, market updates, option trading videos, and much more! Erik Epp is a veteran options trader. We hope you find his insights helpful to your own options trading.

Below is a summary table of what the market been doing during the past week and since the October 2010 options’ month started.  The market appears to be on a bullish or at least bullish technical run for now.  That will mean a good bull option trading and stock trading.  But is it really on a bullish run or just a bear bounce “fake bull” run to fool the option trading and stock trading crowds.  Only time will tell.

Take a look at the chart below.  The SPY broke a resistance line (white horizontal) around the 114-115 mark.  The next line of resistance is around the 118-119 (yellow horizontal).  If it breaks that one then the red horizontal line of around 122.  The real question is if this is a real bull breakout or a fake bearish correction breakout.  Also notice that the 10 day Moving Average line (yellow) crossed above the 20 day Moving Average (purple) early September.  The next step will be to compare these moving averages to little longer ones, such as 40 or 50 and even 80, 90 or 100.  I will do that on another chart, another day for simplicity.

Well, as is quite common the past few weeks, the market goes up and down but in the end (based on a weekly basis) it changes very little, this week is no different.  It is true that it is the summer and usually summers are not known for large market movements, one way or another.  But it is also true that the market does not seem to have a reason to go up substantially and a good reason to go down to reflect reality.

The US economy is growing (if one can believe the official reporting) at an anemic rate.  Unemployment is high and unlike the past, many of these jobs will not be coming back since the US shipped most of its manufacturing (the place for a large number of jobs) overseas.  With no jobs, consumption is being reduced to essentials.  The private, for profit Cartel (Fed) is speaking tough about what they can do, but all they can do is buy more US Treasury notes and bonds (for which they get paid interest of course from the American tax payer) and then CREATE OUT OF THIN AIR dollars by lending them to government, banks and Wall Street of course.  So the moment the OUT OF THIN AIR created dollars are put into the system via the loans, they become REAL!  So what is really the risk for the Cartel?  NOTHING!  They created the loans out of NOTHING!  ALL the risk is now in the hands of the borrower(s)!  WHAT A SCAM!  In other words, the CARTEL “actions” are nothing more than indebting deeper and deeper the American people, via their “Elected Representatives’” (either party) and Government (either party) by increasing the debt(s) and deficit(s).

Ok, here is the $64,000 question, especially to all the noise makers, hot air big mouth geniuses out there; how are you planning to pay for all this, assuming of course that you will keep this Cartel’s scam in place?

Anyway, with this kind of picture, the way I see it, the much higher risk and probability is for the market to go DOWN!, and hence why I suggested Friday to buy the put on the DIA, the Dow Jones Industrial Average ETF.  By the way, the market being cut by 30 – 50% in the next 1 – 6 months will not surprise me.  Naturally, if I am wrong (which is always a good possibility), the cost of the insurance (the DIA put) will be simply that: A cost for protection, which is why we kept it relatively cheap.  However, if I am right, the put will go up substantially in value; we have over a year for this put to protect us, even if only partially.

As I mentioned during the last couple of weeks, other publications are finally waking up to this scam between Washington, the Cartel and its minions and Wall Street (once again, I realize that it is all Obama’s fault, but where were they before Obama when all this mess developed and eventually exploded?).

Here is a link to an article in the Wall Street Journal.

And this is a title to an “infomercial” (to sell the best stock since sliced bread) that really caught my attention:
“The Rise of Financial Terrorism”

Yes, they mean Washington (either party), Wall Street, the Cartel and their minions.

I am really glad that more and more of it is being exposed.  Maybe, just maybe, we will see some movement from the American people electing and demanding Washington representatives that actually represent the voters’ interests, not the “Financial Terrorists” and get rid of them if they do not.  By the way, are you noticing how the word “Terrorism” or its offshoots are becoming such a wide spread and generic used “TRIGGER” word(s)?  I believe that it is the Chinese who have a saying that “It is easier to label (the trigger word) someone (or finger them) than actually debate the issue(s) or facts” (or something like that). I’ll let you think of the many other examples of trigger words (labeling) out there.

The market popped up this week on “better” than expected revenues from several companies.  Of course if the “expectations” are low to begin with (the analysts and the companies do not want to “disappoint”), surpassing them is not a big task.  Add to it that much of the “increase in revenues” came from cost cutting (such as letting people go) and accounting (such as one time items) and the picture MAY not be as rosy as it might appear.

Here is what the SPY chart looks like this week, rising 38 points or 3.6% (as per comments last week, we are using last week’s closing price as the basis for the percentage).  Below is the WEEKLY chart since the beginning of 2010.

On a weekly basis (Friday to Friday closings) the next hurdle for the SPY to overcome on the upside is 112 which occurred on June 18, 2010 (options expiration day). On a daily basis, May 17th close @ 114 is the number to beat.

As I wrote last week, let’s not jump for joy about the “market recovery” yet (paraphrasing).  Well the market (SPX) dropped back to where it was on June 4, 2010 (identical closing number), DOWN 52.63 points or 4.7% from the end of last options’ month (June 18, 2010).  Once again the “magic math” when it comes to percentages is in play.

IN POINTS the market basically dropped by the same amount of points as the rise of last week (53 drop 55 rise) yet it appears that on a percentage basis the rise was much higher than the drop; 5.4% vs. 4.7%.  The reason is quite simple: We use TWO different bases for the percentage calculations; the closing number of 1022.58 on July 2, 2010 (for the rise) vs. the closing number of 1117.51 on June 18, 2010 (for the drop).

The point I am trying to make here is that percentages can be deceiving.  Let’s try this:

A house cost $100,000
A year later it rises 25% and a year after that it drops 20%.  After the two years, is the house value more than, less than, or the same as the cost?

The answer is THE SAME!  The house rose 25% or $25,000 (25% of 100,000 = 25,000) to $125,000.  It then dropped 20% or $25,000 (20% of 125,000 = 25,000) back to $100,000 value.  So even though the dollar rise or drop is identical, the percentages are different due to the different basis they were based on.

Here is what the SPY chart looks like this week:

Notice the RISE in volumes during the past week vs. the DROP in volumes the (which I mentioned last week) during the rise.  So let me repeat what I wrote last week:  “Forgive me if I remain cautious and somewhat skeptical of this ‘market recovery’.”  I think that the market bias is to the downside at the moment.