By Chris Ebert
Candlesticks are a common tool that some stock market traders use to gauge sentiment and emotions in the market. Since emotions affect the reactions of traders, the reactions of those traders can reveal their emotions; and knowing those emotions can give a trader an edge.
Traders who are aware of the predominant emotions in the market can make educated guesses about how the market will perform in the future, albeit not with 100% accuracy, but with enough accuracy to be helpful.
Candlesticks can help traders detect emotions. Understanding those emotions, however, can be confusing. In order to dispel some of the confusion, an analysis of stock options can shed some light on emotions, thereby making candlesticks easier to decipher.
To begin an analysis of stock options covering a broad basket of stocks, it is important to know which types of specific option trades are currently profitable on the S&P 500 as a whole.
*All strategies involve at-the-money options opened 4 months (112 days) prior to this week’s expiration using an ETF that closely tracks the performance of the S&P 500, such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
You are here – Bull Market Stage 1 – the “lottery fever” Stage.
On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending July 26, 2014, this is how the trades performed:
- Covered Call and Naked Put trading are each currently profitable (A+).
This week’s profit was +3.1%.
- Long Call and Married Put trading are each currently profitable (B+).
This week’s profit was +3.0%.
- Long Straddle and Strangle trading is currently profitable (C+).
This week’s profit was +0.0%.
* All profits are calculated at expiration, as a percentage of the underlying $SPY share price, using options ATM-when-opened 4 months to expiration (e.g. Profit of $6 per share on a Long Call would represent a 3% profit if $SPY was trading at $200, even if the call premium increased 100%)
Using the chart above, it can be seen that the combination, A+ B+ C+, occurs whenever the stock market environment is (more…)