By Chris Ebert

Ever notice how the stock market seems to have a mind of its own, as if it is determined to separate you from your stock positions? If so, you are not imagining things. The stock market is indeed hunting you down; but don’t take it personally. It is simply the nature of the stock market to break the bonds between stocks and stockholders; and it’s called entropy.

Entropy is, quite simply, a tendency toward disorder. It isn’t confined to the stock market. Entropy favors an organized, predictable stock market as much as it favors a sand castle on the beach or a hot cup of coffee. Without outside influence, in time, each of these will return to their natural, disorganized state – the coffee’s organized collection of heat scattered haphazardly throughout the air just like the castle’s organized grains of sand on the beach or stock prices from any level that conveys certainty or order.

Some stock price levels convey more certainty for traders than others. Since the natural tendency is always towards a level of increased uncertainty and increased disorder, knowing which levels are likely orderly and which are prone to be disorderly man help a trader prepare for the next move.

Predicting order is nothing new. In fact, it is the basis for many common trading methods. From candlestick analysis to Darvas boxes, trend lines to Fibonacci retracements, the goal is the same – to search the market for fleeting moments of certainty and order, and pounce on them before entropy runs its course.

There are numerous ways a trader can analyze potential levels of order and disorder, the performance of some simple stock options being one of the simpler methods. An analysis of S&P 500 options may provide some clues as to when broad-based uncertainty and disorder is likely in the stock market as a whole, and when it is not. It begins with determining which types of common option trades on the S&P 500 are currently profitable.

Stocks and Options at a Glance

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an ETF that closely tracks the performance of the S&P 500, specifically the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). All options are ATM-when-opened 4 months (112 days) 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 itself actually increased 50%, 100% or more)

You are here – Bull Market Stage 2 – the “digesting gains” Stage.

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending August 16, 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 +1.7%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -1.4%.

Using the chart above, it can be seen that the combination, A+ B+ C-, occurs whenever the stock market environment is (more…)

16
Aug

By Faces In Cabs

What an odd (and wonderful) price shock for bears on Friday. The news from Ukraine and Russia appeared to darken the recent clouds over the exuberant equity markets. The added drama that this event arrived on OpEx day created a significant reversal and scalping opportunities in the options markets. Furthermore, Friday was a re-balancing day for the $SPX. Clearly, there was a lot going on (mostly underneath the surface) in the equity markets. Here are some charts.

Dow Update (Dow retracement remains questionable)

DOW

S&P 500 ($SPX rejecting its 50 MA so far)

Nikkei and Dow (watching the Nikkei for its Sunday echo to $INDU price action)

Past Bubbles (NASDAQ is back in bubble mode – see blue line)

spx

NASDAQ Weekly (NASDAQ big picture)

Overall, in the equity markets, until the the $SPX can close above its 50 MA (which it rejected twice this last week), I continue to question the resumption of the 2014 rally. This move up remains a retracement until proven otherwise. Even with the obvious volume boost of OpEx and the Friday re-balancing, the SPX could NOT close above and reclaim the important 50 MA level. (more…)

Ask the Option Scientist

Do you haveoptionscientistthumbnail a question for the Option Scientist?

Email it to OptionScientist@zentrader.ca or enter it in the comment section below.

Today’s question: OptionScientist, do you have a chart of option performance going back several years? I would like to compare the current action to past stock-market corrections.

Answer: Long term charts can be difficult to read due to the high resolution required. But, the information they contain can be very valuable. Here is the chart of the Options Market Stages going back 10 years. A high-resolution version is available by clicking on the chart itself.

Options Market Stages 2005 to 2014

Click on chart for larger full-resolution version

It should be noted that only the Bull Market Stages have been shown (for clarity). A Bear market, shown as the (more…)

11
Aug

By Poly

This is an excerpt from this week’s  premium update  from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%. 

 ft

Crude is clearly locked into an Investor Cycle sell-off and traders know it. The massive speculative Long positions that accumulated during the preceding months are now working against the traders that took them. Crude’s normal ebb & flow is firmly in a downward stage, and even though it’s many weeks and $10 into a decline, Crude does not appear to have completed the move.

If Gold should have found this geopolitical environment bullish, then Crude should have found it to be outright explosive. The ISIS group is on the verge of taking control of key oil producing regions in Iraq, the Russian/Ukraine theater remains a hotbed, the West is threatening sanctions against Russia, Russia is threatening sanctions in return, and the Middle East is again at war. Despite these developments, Crude has not been able to manage even 2 consecutive winning sessions.

When we break down Crude’s recent action, it’s clear that July 15th was certainly a DCL, which marks the current DC at Day 18 of a typical 40 day Cycle. The last Cycle ran long by 15 days, so we should expect a shorter-than-normal Cycle at present, one of perhaps 25 to 30 days. But even a Cycle that short provides at least a week until the next expected DCL, leading to the view that Crude has further to fall.

8-9 Crude Daily

The weekly chart is oversold to the extent that we could have seen an ICL this past week. (more…)