So much for sector spreads....

I checked the various SPDR ETFs for suitability for applying the spread trades that I am looking at using and only one, Energy, works. It has penny option pricing and enough interest and volume OTM to be able to produce some credit in the spreads, not a lot though.

All the rest, the primaries anyway (utilities, financial, consumer, materials etc) have very little OTM interest.

Time to review the options playbook and see if another strategy might be suitable for these types of options. I am thinking along the lines of a straddle perhaps, something non-directional that can use ATM or slightly OTM options for short to medium term trades...I prefer credit trades but I will not discount other styles either.

Jeff.

Long term gap fill in SPY, corresponding SPX reference

In September, October and November SPY, (and the underlying S&P 500), have ratcheted up in waves. No, I am not going to even think about getting in to Elliot wave theory... I don't much care for that as it is VERY subjective. Each wave has peaked mid month and pulled back to bottom out at the end or beginning of each month. Of course a pattern like this can be taken advantage of but there are a number of factors that preclude even trying to place such a wager.

Going back in time a bit, October 3rd 2008, the market was in a downturn and as the market tested the SPY $110 mark on the Friday as it hit $109.68 and closed on $110.34.

It opened on Monday the 6th down at $107.15, a $3.19 gap or 2.89% and continued down more than $30 into March of 2009 to a low of $67.10... almost $40 on the money.

This gap is important as September past tested the bottom of the gap and pulled back. October tested the top of the gap and pulled back. November passed the top, basically closing the gap over one year later, and may see this $110 level as support for now.

If the pattern holds I see the $115 being tested by mid December, which puts my $115-$118 spread in serious jeopardy as it is a Dec 31st expiry. If it does not make it to $115 then I think that it may hit $113, pullback to the $110 support level again before taking off to the $116 level and may do so near the end of December...BAH! I may have to close the spread early in either case.

Of course we may see this level be a further test and a correction take place too.

Either way I will not likely set another spread trade right away in SPY as I wait for a bit while this shakes out. I could place a $1 or $2 higher spread, wait for the first trade to atrophy somewhat and close it to keep some credit and just step the spreads up to the EOM.

Hmmm... step spread trading in the same month to capture premiums in an uptrend situation...has some merit for future thought.

Here is the SPX chart for the S&P500 index. I noted that there is no gap on that Oct 6th morning BUT the level on the Friday closed at 1099.23...say 1100 for now and opened on Monday at 1097.56. The S&P dropped from there and returned the next day to test 1073 and dropped never to look back until testing 1073 in September...basically the exact same range as if it had gapped. Same pattern as the SPY, which it should be, just the lack of gap was noted.

The red lines are the Friday Oct 3rd 2008 close and the following Tuesday test of 1073 with the current correspondence

I like how the price is hovering about the 1100 mark after testing and crossing it, nice consolidation... begs the use of a directionless spread trade to capture the move which ever way it ends up going, as long as it goes quickly. The short Linear Regression channel is showing signs of a slowing down of the uptrend which is remaining within the longer term LR channel so far. Target moves, like in the SPY, are 1080 on the bottom and 1150 on the top.

Jeff.

The problem with first of month timing

One thing that came of my historical study of SPY while applying the trade levels was the realization, or perhaps the confirmation, that first of month trading is not necessarily the best approach.

With some strategies a dollar cost averaging approach works well in keeping regular investments applied without regard to trying to time the market to get the best price. Dividend Re-investment Plans for example, no commissions and timing should not be a concern. Even those nasty mutual funds work on the same principle. Due to the expiry dates on the options I sort of just used first of month as a default trade entry time.

Spread trades are, by their nature, a timing style trade, as most are that involve any technical analysis. Buy low and sell high. The same rule applies to spreads except it is sell high and let it expire. Selling high refers to the price of the options, not the stock as a bull put spread is best to sell when the stock price is low.

This is where the linear regression worked well. Using the spreadsheet calculations I can easily set a nice range for the call side but only when the stock price is near the top range of the regression channel. On the bottom side the same thing applies to the put side of the trading. This is where the best prices come into play for the options.

So it is not best to place the puts and calls at the same time nor is it best to just use a "day of the month" approach to trading.

I apply a trend factor to the call side that allows me to use a 1.0 for a typical downtrend, 1.5 if it is short term trending up and a 2.0 if it is long term trending up. This changes the spread "head room" from the stock price and lets me play bear call spreads in all markets. Bull Put spreads I would only trade in an uptrend due to the volatility of a down move being so much greater than that of an upmove. Just too risky.

This leads me to review my goals for trading. I have been trying not to look at ROI as much as cashflow in the account. If I look after the cashflow, ROI will look after itself. As a result I am not aiming for high ROI targets but targets that meet a certain daily average trade value. This is not something that is easy to do with typical stock trading as a stock move will determine my cashflow and the stock move is not a predictable thing, in the broader sense. Spread trading, due to selling premium can achieve daily average targets easier as the target profit is know up front.

In Optioneer my minimum target is $10 per day per trade, each trade is about $4600 risk capital which is between 5% and 10% overall ROR depending upon the term of the trade. 5 trades available. I will bump the risk up, and did recently in order to secure a higher return per day.

In Questrade my daily average seems to be coming up to $3 per day based on $1000 to $1200 risk capital with a 4 contract spread only. 4 concurrent trades possible at that level. That puts me into the same 5% to 10% ROR. Due to the commission advantage with Questrade I can make the trade more efficient by just upping the contract size to 17 so I could use the same risk and ROR as Optioneer to leverage my daily average up to $15 or more OR I could lower the risk to $3000 to hit the $10 mark instead with 11 contracts.

In order to keep diversity with Questrade I will stick with the smaller trades and set them at various points along the price curve. The trouble is that to pick the best price it will only cycle roughly once per month which means getting four separate trades per month is not likely. Three, one on the way up to the upper linear regression channel, one on the way down and perhaps a put spread at the bottom.

I need to work on a diversity method which may involve using other ETFs or even stocks to round out my portfolio of option trades.

These posts are never as short as I would like them to be.

Jeff.

Dual timeframe linear regression and SPY spread trades.

I have been looking at a number of methods to have a trend indicator properly indicate a trend. The trouble is not so much getting an indicator to do this as it is to get one to do this with the sensitivity that works for me. I can easily eyeball a price chart and see the trend setting up even without the typical SMAs.

One that seems to give me both a trend indication and a channel range gauge is plotting two linear regression tools on the same chart.

One is 40 days which gives me some level of sensitivity as it uses the last 8 week average price slope bracketed by one standard deviation.

The other is an 80 day which gives me a larger trend slope and one standard deviation channel.

The slope of each with respect to the other gives a very easy and quick idea of where the trend is likely to be heading and what the most likely outer range is going to be.

See the shorter 40 day is mostly bracketed by the longer 80 day LR channel and they are both, more or less heading in the same direction.

This would let me place trades within the upper channel for a bear call spread while keeping me out of any put spreads altogether. If I were one to play the odds on something like this I might place the call spread for a credit and use that credit to buy a long put to give me some further downside exposure, but that is another strategy for another time.

Here is another period with the same linear regression settings:

The wide deviations are almost horizontal indicating a likely shift in trend with the shorter term LR heading sharply up. A typical phrase is to "trade with the trend" but here which trend to choose. Normally I would suggest the longer term IF it were more pronounced. In this case the longer term is weak and the shorter term is much stronger.

On trade day the price is approaching the 200 sma which can be typically resistance so a decent spread is available that might use that as an additional guide. Notice how the 300 turns from resistance once it is broken and the price literally bounces off of it and forms the beginning of the latest trend toward recovery.

The last chart is two months farther along. The long term has turned up but the short term has weakened. This is a good time to pull a spread in a little tighter as the price will head up long term but the short term trend is a little consolidation, prime spread time and full iron condors would be appropriate here so puts spreads would bracket this on the bottom. The 200 has turned support so this gives more odds in favour of a further move up, eventually.

Enough for now except to note that the dual linear regression periods may just take the place of my more complicated calculations for risk and range for spreads in order to simplify this whole process... afterall that is one of my goals.

Jeff.

Closed another long call

I sold a long call today to take advantage of a profit jump. while it is not a large one it still keeps my win loss ratio up a bit and lets me nibble away at securing some gains from my many long call option trades that are going to expire in December and January. There are a number that are not going to return from zero, less than six anyway.

I am not going to post new stats on those trades just yet, just don't have time to do the calcs as I am into the spread trade setups and testing right now.

Jeff.

Save my work next time and the current trade analysis.

AAARRGH!

I was plotting a SPY chart with all of the trades based on my spreadsheet calculations. I was finished and I didn't save it before changing the chart style...I forgot that the chart style will over write plottings. So I lost the last half or better. What a pain.

Anyway, the whole exercise was aimed at getting familiar with the movement of the linear regression channels, the spacing for spread trade setting and to see how well my spreadsheet calculations worked toward being able to take advantage of bear call spreads in an uptrend...against the trend. I placed put spreads in as well.

All trades were deemed placed on the first trading day of the month for that month's expiry, one for the 3rd Friday and one for the EOM. All trades were profitable but, due to the difficulty in obtaining decent data for options history I Just went with the fact that all trades expired leaving me with all of what ever profits the spread may have been setup for.

So, rather than trying to duplicate the chart I'll post a chart showing the dual linear regressions instead.

Then I used today's data for a current trade based on a similar setup. The yield was only 5% using a $3 spread and staying far enough away from the price to be as risk free as the rest of the trades. The return per day was $3.25 and the risk was around $1000. A little lower than I thought it might be but with today's market gains the volatility dropped.

Following that I used today's data to determine the trade value for a December 18 expiry and Dec 31 expiry trade placed today.

The bear call spreads came up to $116 and $118 while the bull put spreads are at $108 and $107. The calls are according to the calculations with a 1.5 risk adjustment due to the strong uptrend historically. The puts are rather aggressively placed, I might favour dropping one strike and increasing the spread to raise the absolute return value.

The trade that I did place on Friday is a little low. I added some price forecasting and I expect to need to exit this trade before expiration unless the topping that is started continues and I get a little lucky. I did mention that I thought that trade might be a bit low.

Jeff.