By Chris Ebert

Note to readers: The weekly updates of the S&P 500 options market are now presented here each Thursday evening. In-depth analysis of the options presented here will continue to be published each Sunday morning.

In the stock market, height is important. But, speed is even more important. If stock prices move too slowly, traders get anxious, even when prices are climbing to new highs. A rally without a little irrational exuberance can be a dangerous thing. Exuberance keeps fingers from hovering over the sell button. Exuberance keeps short sellers on their toes; quite simply, exuberance keeps the Bears away.

The S&P 500 nudged the 2100 level for the first time ever this week. At first glance, that could be considered to be quite an accomplishment; and in some ways it is just that. But such arbitrary milestones – psychologically significant round numbers such as 2100 – generally don’t have any long lasting significance, especially when there is a lack of exuberance.

What is significant is that such an accomplishment for the stock market does not currently include an accompanying accomplishment for many traders in the options market. Option traders, particularly Long Straddle* traders are not profiting from the rally to S&P 2100. Moreover, Long Call* traders are barely eking out a profit these days. Those traders should be rolling in money when the market makes new highs – but they’re not.

About the only option traders who are consistently earning a profit these days are Covered Call* traders, but they earn a profit in all but the most bearish environments. Two things are certain: unless Long Straddle traders begin to share the benefits of this rally, the rally will lack the very exuberance that makes rallies sustainable. And, if Long Call traders begin to lose what little profit that have managed to gather recently, the rally is likely doomed to fail from lack of momentum. A rally to new highs cannot live on Covered Call profits alone.

  • Bull Market Stage 1: If the S&P climbs above 2150 rather soon the increase in exuberance would add sustainability to the current rally.
  • Bull Market Stage 3: If the S&P falls below the 2100 area in the near future the lack of momentum could doom the current rally to failure.
  • Bull Market Stage 2: If the S&P remains in the 2100-2150 range through early March, the lack of enthusiasm could make long-term sustainability for the current rally iffy.

Stocks and Options at a Glance 02-19-15

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.
EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

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 week, as of February 19, 2015, this is how the trades are performing on (more…)

18
Feb

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

 

There is not much of note to add to my equities analysis midweek, only to state that the bid under the markets appears to be real and firm. If this was a fake move designed to trap speculative bulls, then I believe the markets would have reversed the second they made new all-time highs.

As equities made a Day 11 high yesterday, that may be the extent of the move for the first half of this Daily Cycle. Although another push to new all-times could come this week, in general, it is more likely now that the next significant (short term) move is to retrace back towards the next Half Cycle Low. Of course, it is difficult to predict the day to day movements, but a new (significant) upside move should not occur until we first see some type of consolidation period over the coming days. It does not necessarily need to come in the form of a price decline, but some time in this area would be needed before the next move occurs. Overall, this setup is positive and there is no reason why we shouldn’t eventually expect a continuation of the rally.

2-18 Equities Daily

 

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A New Rally Should Be Staring Soon

By Chris Ebert

In this week’s Thursday Evening Options Brief it is clear the S&P 500 has not yet achieved the exuberant Lottery Fever status, despite the most recent rally to new highs. Thus, absent the euphoria of a Lottery Fever environment, a pullback from the current high, or a pullback off any subsequent high is something for which traders should be prepared. The market is still in the habit of digesting its gains, and pullbacks are its primary means of digestion.

The Quandary of All-Time Highs

How can one enter the stock market when prices are at or near all-time highs, without taking on the risk that those highs might later turn out to be the very top of the market? Options can be very helpful in that regard, as will be presented here today in a specialized strategy that can be tailored for just such a scenario – an option trade that benefits from a temporary pullback off highs.

Pullback off High

Bull Markets are Risky for Short Sellers

In last weekend’s market analysis it was observed that:

“It’s a cruel truth of the stock market that those traders who sell, based upon their belief that market fundamentals do not support the existing high levels for stock prices, will often be punished. “

The reason traders get punished for selling or shorting when the stock market is at or near its highs is rather simple. Prices that are (more…)

By Chris Ebert

Note to readers: The weekly updates of the S&P 500 options market are now presented here each Thursday evening. In-depth analysis of the options presented here will continue to be published each Sunday morning.

The S&P 500 has rallied to near all-time highs once again. Yet, from an option trader’s perspective it is not quite as bullish a scenario as might be suspected.

Long Straddle* trading is not currently profitable; and Long Straddle profits are something that generally occurs relatively frequently in a healthy Bull market rally. Such trades generally only return profits during periods of irrational exuberance, known here as the Lottery Fever stage of a Bull market. Lottery Fever is not yet confirmed by this week’s options performance.

Although the presence of irrationality in the market can be dangerous, the tremendous gains that traders experience during irrational rallies serve as the incentive that keeps traders participating in the market through less exuberant times. Without the possibility of irrational exuberance from time to time, traders can eventually become less willing to risk as much.

A decreasing willingness for risk-taking can lead to price stagnation, consolidation, pullback, or worse yet, correction. The S&P has not reached the Lottery Fever stage since early December. If it fails to reach that stage soon, any rally could fizzle out, even a rally to new all-time highs.

A return to Lottery Fever would occur if the S&P tops 2104 this week (by Feb. 14) or 2143 next week (by Feb 21). Otherwise, the S&P 500 is likely to continue its current process of Digesting Gains, a much less exuberant environment than that of Lottery Fever. Unless Long Straddle trading becomes profitable, Bull Market Stage 2 will continue.

Stocks and Options at a Glance 02-12-15

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.
EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

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 week, as of February 12, 2015, this is how the trades are performing on the S&P 500 index ($SPY or $SPX):

  • Covered Call and Naked Put trading are each currently profitable (A+).
    This week’s profit was +3.5%.
  • Long Call and Married Put trading are each currently profitable (B+).
    This week’s profit was +2.7%.

(more…)