By Chris Ebert
Note to readers: I’ll be away for a few days. The normal detailed options analysis of the S&P 500, and its implications for the stock market, will return Sunday July 27.
As of July 17, the S&P had not breached the 1930 level – an important level because of its effect on Long Call* and Married Put* option trading, and the historical implications those option trades have on the emotions that drive future stock prices. Long Calls and Married Puts won’t suffer losses unless the S&P falls below 1930 over the next several weeks.
Historically, as long as at-the-money Long Calls and Married Puts are profitable, bullish traders are so confident that they buy every dip.
Last Sunday, evidence was presented here that short-term pullbacks in the S&P 500 are not likely to interfere with the ongoing Bull market rally unless the S&P falls below the 1930ish range. A move below would likely create a brick wall of resistance at the recent high, as traders would tend to acquire a “sell the rip” mentality, at least temporarily, after a breach of 1930.
Last Sunday’s complete analysis is available here: Stocks Digesting Gains And Nothing More
As long as the S&P does not fall below 1930 in the next several weeks, any sell-off, no matter the cause, can be argued to be nothing more than normal digestion of recent gains in stock prices. The analysis in the link above continues to apply.
As long as a trader is practicing good risk-management (with proper position sizes, stops, and/or options as hedges) there is no reason to panic, at least until Long Calls fail to profit; and even then, panic is likely unjustified unless Covered Calls fail too.
Unlike many traditional forms of market analysis, the options analyses presented here do not change. They are not affected by economic news, no matter how severe. The consistent view provides traders with a semblance of certainty – something to cling to in uncertain times – which can provide an edge by helping avoid potentially damaging trades based on emotions.
*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)
The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!” He 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
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