18.23% Return Produced During July Option Expiration Cycle

As we move through the July monthly option expiration which will occur on July 19, 2013 at the close of business we can look back at the expiration cycle that was. The end of the June monthly option expiration nearly marked the recent market lows. Since the beginning of the July expiration cycle we have seen the S&P 500 Index charge higher.

The recent performance in the Options Trading Signals portfolio has charged higher as well. There were 4 trades that were closed during the July expiration cycle. The 4 trades that were closed had a total gross gain of $169 per spread. The total risk assumed in the 4 closed trades was $927. Thus, the four trades produced a gross return on maximum risk of 18.23%.

A trader that risked roughly $2,500 per spread would have had a gross gain of $1,951 for the month of July. The table below demonstrates the trades that were closed during this expiration cycle.



In full disclosure, there were three trades that were rolled forward as price action did not accommodate trade expectations. However, the overall results of the OTS Portfolio since the beginning of the June expiration cycle have been outstanding. The full trade performance is shown below based on actual trading results from the portfolio.



Since the beginning of the June monthly option expiration cycle, the Portfolio has closed 15 total trades. In that time frame only 1 trade has produced a loss and that trade essentially was breakeven overall. The total recent trading results speak for themselves.

Since inception, the OTS Portfolio has taken 171 trades publicly that have been opened and closed. Of the 171 trades executed, 125 trades have produced gains. This equates to over a 73% success rate for all trades that have been opened and closed for the OTS Portfolio since late 2010. It is not a coincidence that the typical probability of success that I focus on for the service is between 60% – 80% probability at the time of trade entry.

Overall, the OTS Portfolio continues to generate strong trading returns while providing members with an opportunity to look over a professional trader’s shoulder to watch how trades are evaluated and when they are taken and why.

The OTS portfolio strategy is focused on a mathematical approach to trading options that gives traders a probability based edge. No more red and green arrows, no more charts with 500 indicators, and no more confusion. The system used is simple and has proven that strong trading results are possible when simple discipline is applied.

If you are looking for a mathematical and statistical based approach to trading, Options Trading Signals service may be a perfect fit to improve your option trading results.  


Click here to give Options Trading Signals service a try today!

The SP 500, Apple Earnings and Feeding The A.D.D. Monster

The last hour of trading was intense on Tuesday and then all eyes were focused on Apple’s earnings which were released around 4:30 ET. The initial reaction to the earnings release is negative although as I write this AAPL is bouncing sharply higher in after market trading on strong volume.

To put the final hour’s volatility into perspective, at 3 P.M. Eastern Time the S&P 500 Index was trading at 1,217. A mere 12 minutes later the S&P 500 Index pushed 15 handles higher to trade up to 1,232. Then sellers stepped in and pushed the S&P 500 lower by nearly 12 handles in the following 20 minutes.

The price action was like a roller coaster and I was sitting watching the flickering red and green bars in real time with the anticipation of a child. It was the most excitement I have had in quite some time, but please don’t hold that against me. I don’t know whether reading my previous line makes me laugh or cry, but the truth must be heard I suppose.

Enough self deprecation, I want to get down to business with some charts and what is likely to happen in coming sessions. The sell the news event in AAPL has the potential to really change the price action tomorrow. If prices hold at lower levels, the indices could roll over sharply tomorrow. The S&P 500 E-Mini futures contracts are showing signs of significant weakness after the earnings miss by Apple in aftermarket trading.

Some other potentially game changing news items came out of Europe where Reuters reported earlier today that the Eurozone will likely pass legislation that will ban naked CDS ownership on sovereign debt instruments. Additionally, Treasury Secretary Timothy Geithner stated this morning that a forthcoming FHA announcement involving a new housing refinance plan was going to be made public in coming days. The statement regarding the new FHA plan helped the banks and homebuilders show relative strength during intraday trading and likely were behind much of the intraday rally.

I would point out that the S&P 500 Index (SPX) broke out slightly above the August 31 highs before rolling over. The reason that is critical is because the S&P 500 E-Mini futures did not achieve a breakout, but tested to the penny the August 31^st highs. I am going to be totally focused on tomorrow’s close as I believe it will leave behind clues about the future price action in the S&P 500 leading up to option expiration where volatility is generally exacerbated. The daily chart of the S&P 500 Index is shown below:



If Wednesday’s close is below the recent highs near 1,230 we could see this correction intensify. The price action on Tuesday helped stop out the bears and if we see a significant reversal tomorrow the intraday rally today will have been nothing more than a bull trap. The price action Tuesday & Wednesday could lead to the perfect storm for market participants where bears were stopped out and bulls are trapped on the potential reversal.

Another interesting pattern worth discussing is the head and shoulders pattern seen on the SPY hourly chart. The strong rally to the upside may have indeed negated the pattern, but if prices don’t follow through to the upside in the near term and the neckline of this pattern is broken to the downside we could see serious downside follow through. The hourly chart of the Spider SPY Trading ETF is shown below:

Ultimately there are two probably scenarios which have different implications going forward. The short-term bullish scenario would likely see prices breakout over recent highs and push higher toward the key resistance area around the 1,260 price level. The 1,260 price level corresponds with the neckline that was broken back in August that led to heavy selling pressure.

Bullish Scenario
If we do breakout to the upside, the longer term ramification may wind up being quite bearish as most indicators would be screaming that price action was massively overbought at those levels and a sharp selloff could transpire into year end. The daily chart of the S&P 500 Index illustrates the bullish scenario below:




Bearish Scenario
The short term bearish scenario would likely involve a break below Monday’s lows that would work down to around the 1,140 level or possibly even lower. If a breakdown took place, a higher low could possibly be carved out on the daily chart which could lead to a multi month rally that would likely see the neckline mentioned above tested around the holiday season. The daily chart of the S&P 500 below shows the bearish scenario:



There are a variety of reasons why either scenario could unfold. Most of the analysis that I look at argues that the bearish scenario is more probable. However, based on what happened in the final hour of trading on Tuesday and the surprise earnings miss from Apple anything could happen.

I will likely wait for a confirmed breakout either to the upside above recent highs or to the downside below the neckline of the head and shoulders pattern illustrated above before accepting any risk. I am of the opinion that risk is exceptionally high in the near term. I am not going to try to be a hero, instead I am just going to wait patiently for a high probability setup to unfold.

Until a convincing breakout in either direction is confirmed, I am going to sit on the sidelines. I am quite content just watching the short-term price action without taking on any new risk. For those that want to be heroes or feel they have to trade, I would trade small and use relatively tight stops to define risk. Risk is excessively high!

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.Com and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

JW Jones

Get J.W.s Latest Options Trading Signals Articles

Is The SP 500 Putting in a Top?

The past few months have been very difficult to navigate for retail investors and institutional money managers. The huge week to week price swings and increased volatility have made the current market conditions exceptionally difficult to maneuver. Day traders are about the only group of market participants that outperform during periods such as we have seen since the beginning of August.

Before I jump into the analysis, I would like to point out to readers that the S&P 500 Index (SPX) has rallied from 1,075 on October 4^th to 1224.50 on October 14^th. The S&P 500 has rallied almost 150 handles or 14% from the lows to Friday’s close in 10 calendar days. As an options trader and a market participant, I trade the market that I see, not the market that I want. With that said, ask yourself this question: Does a healthy financial construct rally 14% in 10 calendar days?

To put the recent price action into perspective, since the beginning of the year 2000 the S&P 500 would have had a poor track record on an annualized basis when compared to the past 10 calendar days’ trough to peak performance. Only in the years 2003, 2006, 2009, & 2010 would an investor have been able to best the previous 10 calendar days’ performance (Performance data courtesy of Wikipedia). The most amazing thing about the recent price action is that the S&P 500 Index is still underwater for the year even after rallying roughly 14%.

At this point two scenarios are likely to play out. One scenario involves a rally on the S&P 500 towards the key 1,250 – 1,270 resistance zone which is outlined on the chart below. The recent price action in the S&P 500 has been volatile and at this point it has gone nearly parabolic. The daily chart of the S&P 500 Index is shown below:

The resistance level shown in the chart above outlines the key 1,250 – 1,270 resistance zone that will be tested if the S&P 500 can breakout above the 1,230 resistance level. However, it is critical for traders to recognize that probabilities are starting to favor the short side. Let me explain.

If the S&P 500 is able to rally into the 1,250 – 1,270 level it would represent a gain of less than 4%. The bears will vigorously defend the S&P 1,250 – 1,270 resistance zone and it is unlikely that price action will be able to take out that resistance zone on the first breakout attempt.

With only 4% upside, the odds of some sort of correction are favorable at this point in time. Whether the correction begins early next week or whether we have to wait until the key resistance zone is tested, sellers will step back into the driver’s seat in the not so distant future.

McClellan Oscillator

A few data points that exemplify the overbought status of the S&P 500 are shown below. The first indicator is the McClellan Oscillator that my trading buddy Chris Vermeulen pointed out to me.

50 Period Moving Average Momentum Chart

The momentum chart shown below courtesy of www.barchart.com illustrates the number of domestic equities trading above their key 50 period moving averages:

Both charts above are warning signs that this rally is starting to get a bit overheated. I would point out that the past two times the McClellan Oscillator and the momentum chart peaked a nasty selloff occurred shortly thereafter. The one point that I would like to make clear to readers is that each time both indicators peaked prices eventually went much lower.

The evidence would lead astute traders to believe a top was near. The more arduous details about the future of the S&P 500’s price action revolve around where the topping formation will be. Will the S&P 500 find resistance on a second test of the key 1,230 resistance level?

The other scenario would involve higher prices next week that eventually reach the key 1,260 – 1,270 area on the S&P 500. Will price work roughly 4% higher before confirming a top at the key breakdown level that initiated the selloff back in August?

Conclusion

I am of the opinion that a topping formation or pattern is likely near, but the location of the top is unknown to me presently. More importantly the forthcoming selloff resolution will be very telling about the current trend of the marketplace.

The most constructive price action that we could see would be a selloff that results in a higher low on the daily chart. If that type of price action plays out a new bullish run could begin. However, if we form a top and price action breaks down below recent lows it would not be surprising to see another lower low form which would put the trend squarely in favor of the bears.

The most important aspect of coming weeks will not necessarily be where a top forms, but if and when a selloff begins. Ultimately the depth, momentum, and ferocity of the selloff are more important than where the topping pattern begins.

At this point I have no purely directional trades on the books, but I am developing a laundry list of shorts that make sense. After all, volatility has declined quite a bit and puts are starting to get a whole lot cheaper!

In closing, a top is likely in the cards in the near future. However, the strength and momentum of the forthcoming selloff will tell the real story about the future direction of stock prices. The next few weeks should be quite interesting!

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.com and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

JW Jones

Just Click Here to get all of JW's Latest Articles