By Chris Ebert
A graphical representation of these option index updates may be found here.
Option Index Summary
The Covered Call/Naked Put Index (CCNPI) continues to indicate bullish sentiment while the Long Call/Married Put Index (LCMPI) shows little if any bullish strength. The general trend over the past several months has been one of decreasing bullishness and also decreasing strength. This trend cannot continue indefinitely without a major move in the market.
At some point in the next several weeks, the market will need to make a decision. Either the current trend of decreasing bullishness will continue, or it won’t. The implications of either scenario are fairly obvious. If the trend continues into August, the small amount of remaining bullish emotions will be replaced by bearish ones and there will be a major selloff. If the trend levels off or reverses, the market is likely to re-test the highs of April and May. There is not much middle ground. One way or the other the Summer Doldrums must soon come to an end.
Covered Call/Naked Put Index (CCNPI) – Mildly Bullish
At-the-money covered calls and naked puts were profitable this week, whether they were opened 7 days ago, 28 days ago, or 112 days ago. Profitability of covered calls and naked puts generally indicates bullish sentiment among traders, but recent profits have been much lower than earlier in the year.
Long Call/Married Put Index (LCMPI) – Weak
At-the-money long calls and married puts have been struggling lately, especially those opened 112 days prior to expiration. While those opened nearer to expiration have recently given indications of short-term strength, the general trend has been towards weakness.
Long Straddle/Strangle Index (LSSI) – Normal
The LSSI remained normal this week, suggesting that the emotions of traders are currently justified. When the LSSI is normal, attention to any trends in the CCNPI and LCMPI is warranted. This week, those trends are suggesting that the market will become decidedly bullish or bearish in the near future.
All Index values are calculated relative to the S&P 500 using volatility data to extrapolate the theoretical performance over the given time periods. It is not possible to match the exact performances shown because the strike prices and expiration dates available in actual trading will always differ from those used in the calculations.
The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book “Show Me Your Options”.
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