Joe Rogan’s thoughts on how things are and how they should be.
By Chris Ebert
The S&P 500 has hovered around the 2100 level quite a bit recently. That didn’t happen by chance; there’s a very good reason that level is so important right now. It represents a battle zone; and perhaps there is no better way to view that battle zone than by looking at some simple stock options.
Covered Call options generally only return losses in a Bear market. Of course, there are always exceptions to any rule. But, for the most part, a Covered Call* (*see specific description below) will always return a profit during a Bull market, and only return a loss during a Bear market.
S&P Can’t Loiter on Bull-Bear Border
The reason the S&P 500 cannot straddle the dividing line between a Bull and Bear market is that the moment stock prices would move in one way or the other, one side or the other would declare victory and the battle would be over. If stock prices rose, even slightly, the Bulls would declare victory and the victory party would send stock prices even higher, reinforcing that victory.
On the other hand, when the S&P 500 is straddling the line, the slightest dip in stock prices will be a victory for the Bears, and not only will the Bears send prices lower, the fear generated in the minds of the Bulls by such a victory will push many of them to sell their stock positions, in turn adding fuel to the sell-off.
Since the S&P 500 cannot straddle the Bull/Bear dividing line for any extended period of time, and since Covered Call profitability is one way of easily identifying the dividing line, then it stands to reason that the point of Covered Call profitability is a point that is unsustainable for the S&P 500.
Covered Calls are either profitable (and it is a Bull market) or they are not (and it is a Bear market). The S&P 500 rarely sticks around very long at the dividing line between Covered Call profit and loss. Thus, the S&P 500 (the white line in the chart) will rarely hug the red line on the chart. Generally, the S&P either bounces off the red line, or else it passes right thorough without stopping. But it almost never sticks around for a hug.
The dividing line between a Bull market and Bear market is usually not a place of protracted battles. Rather, long drawn out battles tend to take place inside one’s own territory. That’s the case at the moment, as the Bulls are engaged in a battle near the 2100 level for the S&P, well inside Bull-market territory.
Nobody Likes a “Correction”
Next, consider that for any Bear market, there is a zone just above it that is not quite bearish, but considered more of a correction. If Covered Calls are used to define a Bull and Bear market, then Covered Calls (which only return losses in a Bear market) must always be profitable in a Bull-market correction, by definition. Only when the correction becomes so severe that it morphs into a Bear market do Covered Calls suffer losses.
While Covered Calls do return profits during a correction, it turns out that (more…)
by Chris Ebert
Not everyone has the time or the energy to follow the stock market. This can be a crucial flaw in an investment plan such as RRSP, 401k, 403b, IRA or similar types of accounts. Such accounts are designed to allow folks to contribute funds to the stock market when many of these same folks are working full-time jobs that preclude them from having the necessary time and energy to study the stock market. Thus, these investors are prone to wiping out their hard-earned investments when the stock market gets stormy.
Most employer sponsored investment plans offer several ways to allocate funds. Generally there are three main types of offerings, low-risk Cash and Money-market funds, moderate-risk Bond funds, and high-risk Stock funds. Since stock funds tend to offer a chance to grow investments quickly (hence names including Aggressive Growth Funds or Growth-Income Funds) they can be alluring to folks trying to save for retirement. But these funds, by their very nature, come with a risk. They can and do decline in value at times, and declines can be massive when the stock market is experiencing turmoil.
It is difficult for many investors to avoid the downfalls of the stock market, due to the inherent difficulty in timing the market. If an investor knew when to get out of the stock market, he could avoid the downturns that draw down investment balances. Moreover, an investor who does get out of the stock market at the right time may have no idea when to get back in, thus missing opportunities for explosive gains. As a result, many simply take the good with the bad, the gains with the losses, in hopes that things work out over the long haul.
One indicator that may help investors time the market to improve gains is known as the S&P 500 Temperature. This temperature gauge was developed right here at zentrader and is updated here and on twitter as conditions change.
Here’s How it Works
Whenever the S&P 500 Temperature is above zero, it is generally a good time to own stocks, including stock Mutual Funds that are common in many investment plans. When the Temperature is below zero it is often not a good time to own stocks, but to allocate funds to cash or money-market funds. A cash fund tends to grow slowly or not at all, so it is not attractive when stocks are experiencing gains. But when stock prices are falling, moving balances into a cash fund can protect those gains.
As a general rule:
Buy stocks and move investments into stock mutual funds whenever the S&P 500 Temperature goes above zero
Sell stocks and move investments into cash or money market funds when the S&P 500 Temperature falls below zero
Below is the current S&P 500 Temperature as of June 20, 2015:
Since no indicator is perfect, the S&P 500 Temperature can sometimes (more…)
Chris Ebert began contributing to zentrader.ca in 2011 in an effort to spread knowledge about options trading. Now beginning his 5th year at zentrader, Chris is as committed as ever to demystifying the world of options.
Here is a link to the article that started it all ==> Seeing Options from Both Sides
Chris has a way of explaining options scientifically, yet spelled out in easy to comprehend everyday terms, which earned him the moniker OptionScientist. The Ask the Option Scientist segment published by zentrader has helped countless traders learn the ins and outs of option trading.
In addition, Chris developed several options indicators that help predict the behavior of the S&P 500, including:
- The #CCNPI – S&P 500 Covered Call/Naked Put Index
This index helps traders discern Bull markets from Bear markets
- The #LCMPI – S&P 500 Long Call/Married Put Index
A reliable indicator of strong trends as opposed to weak ones
- The #LSSI – S&P 500 Long Straddle/Strangle Index
This index pinpoints possibilities of corrections and also breakouts
- The Options Market Stages
These stages help traders determine the nature of the current trading environment
- The S&P 500 Temperature
A pure and simple gauge of bullish sentiment
- The Orange Line of Violence
This line has become a prominent indicator of upcoming large moves in the stock market
As always, comments and questions about specific option set-ups or option trading in general are welcome anytime. Just enter them in the comment box below or send them to:
The preceding is a post by Christopher Ebert, Chief Options Strategist at Astrology Traders (which offers subscribers unique stock-trading perspectives and options education) and co-author of the popular option trading book “Show Me Your Options!” Chris uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca