By Christopher Ebert

The Long Call/Married Put Index (LCMPI) has remained bullish since mid-December 2011. From January through March of this year the index was strongly bullish before turning mixed on April 6. The recent events surrounding European elections have renewed a sense of fear that a government default may again be on the horizon. These developments have combined with recent weak employment news in the U.S. to cause a significant selloff in the markets.

Last week, the LCMPI was indicating cautious optimism. It now appears that the caution was justified. While the index is computed at the close of trading on Thursdays, the selloff that occurred on Tuesday May 8 may cause the LCMPI to signal a definitive end of the 2012 Bull Market. This update is intended to warn traders of a possible change in sentiment in advance of the weekly update.

Should the S&P remain below 1349 this week, the Long Call/Married Put Index will be negative for the 112-day, 28-day, and 7-day periods. The last time all three periods had negative performance was in early December. Because the LCMPI measures the strength of a bull market, a negative reading would be an indication that the bull market has lost all of its strength. When there is no more strength, the bull market has ended.

The LCMPI is based on the concept that at-the-money long calls or married puts will only return a profit in a bull market. Such trades are only profitable when the uptrend is strong enough to overcome the time decay of the option premiums. A level of 1349 on the SPX at the end of this week would mean that these options would have been unprofitable not only over the past week or month, but over the past four months as well.

If the LCMPI does signal the end of the 2012 Bull Market this week, it is not necessarily an indication that a bear market is ahead. That determination is more easily made using the Covered Call/Naked Put Index (CCNPI) which will be reported here later in the week.

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 with anyone who is interested.

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2 Responses to “Selloff May Trip Option Index”

  1. hari Says:

    Hi

    Where do we get the quote for these symbols

  2. Christopher Ebert Says:

    I currently calculate and publish the CCNPI, LCMPI, and LSSI here on zentrader after the market closes each Thursday. Quotes are occasionally updated when there are significant changes in the market.

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