Assessing The July 26th Market Sell Off

The market really let loose today and I realize that some may have concern about what this means for investors and traders going forward. Will we see more selling? When will it stop?

Yeah, I know. There are lots of questions.

I have put together a video and have loaded it onto my site. It's free for the viewing and walks you through some basic analysis. I hope you find it helpful.

Stock Market Analysis Video

Watch the video. If you are a conservative investor or trader, I'd suggest holding off on opening new bullish positions and perform a quick review of your current holdings to look for weakness and tighten your stops.

Good trading!

Christopher Smith
TheOptionClub.com

Stock Options Trading and the SP500

Friday's gains saw us return to the prevailing bullish market trend. The S&P 500 retraced to 1,487, which was consistent with my expectation.

In yesterday's surge, my bullish portfolio bias allowed for appreciation while short option premium keeps my account theta positive. It's a tough time to be an investor right now because we are seeing a "wall of worry" being built between rising interest rates, inflationary concerns, falling real estate prices, growing mid-east tensions, etc.

As options traders, there is a lot we can do to 1.) preserve our investing and trading capital, and 2.) position ourselves for gains. The typical mutual fund investor can only sit back and hope that the world turns in their favor.

With this correction apparently over, I will probably readjust my hedge positions. The SPYder put diagonal I mentioned in my last post will likely be rolled into a vertical credit spread consistent with the bullish outlook.

My expectation is that the S&P500 will make a new all-time high and work its way to 1,600. That is not a certainty, so we all need to stay sharp and remain observant.

Good trading!

Christopher Smith
TheOptionClub.com

Iron Condor Option Trade on the SPX

An iron condor has been opened on the SPX, allowing for a +1 SD move in either direction. A credit of $1.25 has been received and an adjustment plan is in place.

The location of your strikes is not particularly important to your overall success on these trades. What makes a great options trader is their ability to manage risk. Establish a plan to adjust your position should the market reach a given price point. Be consistent.

Christopher Smith
TheOptionClub.com

Catching Up With The Market and Our Trading Results

It's been a little while since I've been able to post. With school out for Spring Break it was time to get away with the family. Upon our return, it was time to catch up with all of the work that accumulated while we were off having fun.

The April spreads were closed. With the market rallying hard heading into expiration, we were forced to close our trade for a loss. Let's tally up the damage.

As of February's expiration, we had managed to rack up an 11.75% return, or a total combined credit of $1.10. These profits were generated from those trades expiring in January and February, and are documented on this blog.

We sat March out. No trades were opened because I could not find a spread that provided sufficient return to justify the risk of opening it. That worked out well because the market sold off hard on February 27th.

For April, a $1.20 credit was generated from the sale of a 1,460 - 1,470 bear call spread. At that time, the outlook for the index was bearish. The bulls returned early, however. A bull put spread was opened at 1,355 - 1,365 for a .60 credit. The total credit for the trade was now $1.80.

The suspense grew slowly for the remainder of the month. The market did not trigger an adjustment of our position until Friday, April 13, 2007. Prior to that date, I had become concerned and decided to tighten up the spread. The put spread was closed for a .10 debit. The long 1,470 call was sold and rolled down to $1,465, for a net debit of .60. The net credit on the trade was now $1.10.

When the trigger was reached, we were left with the weekend to evaluate potential adjustment. With less than one week until expiration all we could do was close the trade. Resistance was expected at 1,460, and it appeared that we might be able to close the trade for a modest debit. It just was not meant to be. The bulls smashed resistance at 1,460 early on Monday morning and kept on running.

The put spread was closed for a nominal sum, but the call spread cost us a pricey $3.40.

That left me with a net loss for the month equal to $3.40 - $1.10 = $2.30.

The year-to-date return is a loss of $1.20 or -12%.

From here, we shake off our disappointment and move onto the next month.

Christopher Smith
TheOptionClub.com

Adjusting An Iron Condor Near Expiration

The market took back all of the ground it gave up on Wednesday, and now is hovering within 2 points of my adjustment trigger. A comment was posted to my last post questioning when I will close the spread and the short answer is when I can take my profit or am otherwise forced to do so by the market.

The put spread is ready to close. It is a 10 points spread and I have placed a limit order to close it for a .10 debit. That allows me to keep .50 of the original .60 points I opened it for. If filled, I am left with a bear call spread.

Being this close to to expiration with only 12 points of room between the short strike and the market is a worrisome place to be. The reason it is concerning is because the market, as it has shown us recently, is capable of making a 10 point or better move. A big upside move could really hurt a 10 points spread.

I am taking some of the potential sting out such an event by rolling the long 1,470 call down to 1,465. This will leave me with a 5 point spread, cutting my risk in half. It will cost me some of my credit, but at this point protecting against catastrophe is more important than maximizing profit potential on a credit spread.

Mind your risk, too!

Christopher Smith
TheOptionClub.com

Making Money When The Market Is Down!

Wahoo! A little selling on the S&P 500 is just what we needed!

With earnings season here, the expectation is for slower economic growth. Slower growth, plus there was a bigger than expected draw down in gasoline reserves and a smaller than expected build up in oil. There's talk of $4.00 per gallon gas at the pumps.

This was enough for stocks to start lower at the clang of the opening bell, pulling back after their recent gains. By 10:50 a.m. ET, the Nasdaq had fallen 0.7% and the S&P 500 had slipped 0.5%. NYSE volume was tracking about 3% higher and Nasdaq volume was tracking 2% higher.

The minutes from the March Federal Reserve meeting will be released at 2:00 p.m. ET. We'll see what, if any, difference that makes.

The iron condor position is unchanged. We have a bit more breathing room, but we're not yet out of the woods on this trade!


Christopher Smith
TheOptionClub.com

SPX Iron Condor Trading Update

Sunday is the time to review the prior week's market activity and re-assess our current SPX iron condor position. Friday was a wild wide for the major indexes, but they closed nearly unchanged.


Stocks gapped up at the open on strong readings for personal income and spending, manufacturing and construction also helped the early advance. China was then forced back into the picture, with the Commerce Department saying it would start imposing tariffs on some goods. This stirred trade concerns and the equity market dropped as much as 1% intra-day. Late in the day, for the second-straight session, the broad indexes found a second wind and recovered their lost ground. The S&P 500 pared its loss to 0.1%. The Nasdaq closed up 0.2% and the DJIA rose less than 0.1%. For the week, the Nasdaq and S&P 500 both shed 1.1%. The Dow and S&P 600 fell 1% each. The NYSE composite gave back 0.8%.

You will note that MarketClub has generated a sell signal for the SPX, which I saw tick in live that day. Since I am already in an iron condor, I did not open any new stock options position as a result. The erratic action makes for a difficult trading environment, and combined with higher volume across the board it is not a good sign for an early rally following the February 27th sell-off. The market rally has shown signs of weakness in the past few days.

My iron condor is still there and with continued sideways action it could turn out to be a good month. The bear call spread remains my primary concern. The delta of the iron condor position remains negative, so some further downside would be beneficial and would provide some additional cushion between the index and the short call of my bear call spread.

Christopher Smith
TheOptionClub.com

S&P 500 Iron Condor Update

This is a tough market to trade!

Yes, I am watching the market activity with particular interest. With my bear call spread feeling the heat from a fledgling rally, I have been particularly interested.

Some of the heat was taken off of my bear call spread today, with the S&P 500 seeing a distribution day. The index sank 0.8% on rising volume with the help of inflationary concerns and the Iranian government.

So, what's going to happen? I honestly do not know. I follow my rules. I trust my judgment when I don't have an open position.

The market remains in a confirmed rally. Today, March 28th, counts as a distribution day, but the rally is still intact. Whether it remains so, depends upon what happens in the days to come.

Christopher Smith
TheOptionClub.com

S&P 500 Iron Condor and a Potential 21% Profit...

Yesterday, we had another weak profit report by a home builder, Lennar (LEN), a sharply lower consumer confidence reading, and troubling oil prices. The S&P 500 and Dow industrials shed 0.6% each. The small-cap S&P 600 gave up 0.7%. This selling was on lighter volume, however.

The half-point drop in the S&P 500 was certainly a welcome event for my 1,460 - 1,470 bear call spread. During this consolidation I managed to open a 1,365 - 1,355 bull put spread, rolling into an iron condor for an additional 60 cents credit. That boosts the total credit to $1.80, providing now for a maximum return of $1.80 / ($10 - $1.80) = 21.9%.

The market has opened to the downside this morning. My position delta on the newly formed iron condor is negative, so some additional selling is not of great concern.

Mind your risk!

Christopher Smith
TheOptionClub.com

S&P500 In A Confirmed Rally

On Friday, March 23, 2007, stocks ended mixed on lower volume, with the NASDAQ giving up 0.1% and the S&P500 and S&P 600 gaining 0.1% and 0.4%, respectively. However, this mixed trading session capped the market's biggest gains in more than 6 months.



This last week saw gains of 3.2% on the NASDAQ, 3.5% on the S&P 500, and a monster 4.1% gain on the S&P 600. These gains took place with oil trading above $62 per barrel and while the Iranians captured British Marines and naval vessels.

The overall market is in a confirmed rally. Confirmation came on Wednesday when we saw higher price gains on increased volume. Wednesday also saw the S&P500 push through resistance around 1,410 and retake its 50-day moving average at 1,424. The S&P closed on Friday at 1,436.

If this market rolls over and continues the downward trend initiated back on February 27th, the next price target would be about 1,350. This area constitutes about a 50% price retracement from the start of the last rally in July '06.

The question is whether the rally will continue to achieve new price highs. The prior high was at 1,460, which a week ago seemed like safe ground for an April bear call spread. I am not convinced that the market will take this ground by April expiration, but our adjustment trigger is lower than that.

Our plan right now is to continue monitoring the market, looking for an opportunity to open a bull put spread. If the market continues to consolidate its gains, we may have an opportunity to close our call spread for a price near what we received when it was opened. If that occurs, it may be a prudent move to take advantage of it and preserve our capital.


Good trading!

Christopher Smith
TheOptionClub.com

Possible Adjustment of SPX Credit Spread

We are seeing some buoyancy in the market, which is not forcing an adjustment to the bear call spread but just making for a mild level of anxiety. Our adjustment trigger is in place and, given the opportunity, a put spread can be sold to enhance the credit for this trade. What we are waiting to see is whether the market loses upward momentum here.

Also, Karen Guerra, Larry McMillan's assistant, got back in touch with me. She and Larry have "sweetened the deal" for my readers. You may recall that we were offered a pretty good discount on a live seminar with Larry McMillan. Well, they are also throwing in Larry's $599 DVD home study course at no charge. All the details are here:

Larry McMillan Seminar Discount

Or, just call them at (800) 724-1817 and tell them you're a member of TheOptionClub.com.

Good trading!

Christopher Smith
TheOptionClub.com

SPX Follow Through

Yesterday, we had a follow-through day.

Trading was timid in advance of the Fed announcment. At 2:15 p.m. ET, the Fed announced it was leaving its Fed Funds rate unchanged for a 6th consecutive time.

That was expected, but what investors focused on was a change in the central bank's policy remarks. No longer was the Fed warnings that "additional firming that may be needed." The statement was not particularly benign, because they also commented that core inflation has been "somewhat elevated."

Nonetheless, buyers flooded the market. The follow-through causes us to shift our market view from a correction to a confirmed rally.

The S&P 500 added 1.7% and volume increased.

This is good news for bullish investors, but now the tables have turned and the secure feeling of owning a 1,460 - 1,470 bear call spread is gone. With the SPX having added 24 points yesterday, and now at 1,435, we must be wary of the need for a possible adjustment if the buying continues.

My nighlty MarketClub market report confirms this analysis, noting that the high-range close, as well as bullish Stochastics and RSI, are signaling that sideways to higher prices are likely near-term. Longer term, the S&P 500 is noted to be in "Sidelines Mode."

This is a very useful service because MarketClub compiles a tremendous amount of information from the equity markets, future markets, commodities and currencies to provide you with an overall sense of where things are headed. While I still read my own charts, the service provides a source of confirmation.

Needless to say, we now need to think about hedging our bearish position and will begin to consider the alternatives available to us. With four weeks between us and expiration, there is a lot that can happen. It is best to be prepared.

Christopher Smith
TheOptionClub.com

Credit Spread on the SPX

With the SPX hovering near break even today there is little to discern. Yesterday's advance was again on unconvincing volume.

A bullish spread is not being sold right now, but may be entertained if we see the market trade lower. The bear call spread has lost a significant amount of value in both options, a reflection of both theta and falling implied volatility. It is not ready to be closed, and probably will not be ready for a few weeks.

Good trading!

Christopher Smith
TheOptionClub.com

Credit Spread Trading and the SPX

Last week saw the SPX make a relatively large downward move on volume, with the market closing near its lows for the day. This occurred on Tuesday and suggested that further downward movement was in store.

The next day saw the further selling, with the SPX actually breaching the next Fibonacci level. That same day we had a reversal, on volume, with the market closing above the prior day's close and near its intra-day highs. A bullish sign.

So, where does that leave us?

The market remains in a bearish correction, but there has now been an attempted rally. That rally attempt began on Tuesday, with the intra-day reversal. The market must now follow through on volume if this attempted rally has hope of pushing to new highs.


Let's look at the bigger picture, however. What you see above is a long term, monthly chart of the S&P 500 dating back to before the current bull market began. From a long-term view we are still in an interim bearish trend, but is this correction nearing an end?

I sought confirmation of this from MarketClub's chart analysis software and stole an image capture of that analysis, which I have inserted below. What is nice about this analysis is that it is based on defined, objective criteria and the factors being considered are clearly identified.

The outlook remains decidedly bearish, which is consistent with our current directional bias. We have seen one day of buying on volume since the market sold off on February 27th, but one good day does not make for a market rally. Until we see evidence of further institutional buying you will want to be cautious of further potential downside.

Meanwhile, my 1,460 - 1,470 bear call spread remains safely out of trouble. I will continue looking for an opportunity to roll into an iron condor, but I am being rather cautious about this because I want to remain safely away from the market and I also want a healthy credit to justify the risk of selling a bullish spread. Patience and caution are my current watchwords.

Good trading!

Christopher Smith
TheOptionClub.com

S&P 500 Market Analysis

I pulled an intra-day chart of the S&P 500 off of the MarketClub service. If you click on the above chart, it will load a larger image that you may find easier to view.

You have some Fibonacci levels projected on the chart, which show likely areas of support during this pull-back. You can see that the market has now tested the first level, twice. The intra-day bar for today, March 14th, has penetrated that level quite dramatically. Price levels have since recovered, but keep an eye on it because we may be heading down to 1,350.

A few days back I posted a video Adam Hewison put together, performing similar analysis on the Dow Jones Industrial Average. You might review that video to refresh your understanding of this Fib levels and to assess what is currently happening with the major indices.

View the DJIA Video

Good trading!

Christopher Smith
TheOptionClub.com

Failed Market Rally on the SPX

The market sold off heavily again, yesterday. The selling took place on heavier than normal volume. Again, this volume surge is an indication of institutional selling.

Back on March 7th, I told you not to trust the rally attempt unless you saw signs of institutional participation. (See, Assessing a Market Rally.) A rally without these big players is doomed to failure. The buying that had been taking place was on rather anemic volume; and indication the big players were not behind it.

Most of the gains from that rally were lost yesterday.

On the bright side, our bear call spread is well positioned for a maximum return of over 13% on risk capital. If the S&P 500 remains below 1,460, we will likely double our current 11.75% year-to-date return.

I will try to update the blog again later today with some current market analysis.

Keep an eye on your risk!

Christopher Smith
TheOptionClub.com

Analyzing the S&P 500 and a Video on GOOG

We have now had a weekend to think about things that happened in the market last week. There is no doubt that the market as a whole is correcting. The only questions are how much of a correction should we expect and now long will it take.

In Friday's post I shared a video featuring Adam Hewison's analysis of the DJIA. Today, I have another video from Adam with his analysis of Google.

Watch Adam Hewison's Analysis of GOOG

Now, GOOG is a big stock and a Wall Street darling. You may have a position on GOOG, but if you watch the video I think you'll be reconsidering it if you're long.

Adam isn't the only guy looking at the market, however. I've got my chart up, too!

Let's talk about the S&P 500.

Tuesday, Feb. 27th - Before the sell off, we had hit our high just above 1,450 and Monday close a whisper below that level; 1,449.37.

Tuesday's sell-off thumped hard on support at the 1,400 level as 50 points evaporated in the heat of the day's selling. That's a big deal, because 1,400 was our first Fibonacci retracement level. The 50-day moving average was a blur as the market blew past it within the first two hours of trading on Tuesday.

The most important thing you can discern from Tuesday's price action is that this was not the small investor getting nervous. It takes institutional selling to achieve these kind of moves. The "smart money" decided it was time to get out.

Why get out?

Oh, we could talk for hours about inflation, interest rates, slowing economies, the Chinese government, corporate earnings, yada, yada, yada... Look, don't try to find reasons for the selling, just acknowledge what you saw on Tuesday.

The big money decided it was time to get out....

Wednesday, Feb. 28th - Hey! We were up. The price action was unimpressive. The institutions were not behind the buying. But, we closed higher.

Thursday, Mar. 1 - The market could not hold its modest gains from the day before. The market closed lower.

Friday, Mar. 2 - The sellers were back.

What's going to happen now?

Well, no one knows for sure. The best we can do his talk in terms of probabilities. My guess is that next week will see the market move lower. Support should come in between 1,370 and 1,361. Ultimately, I'm looking for the market to hit 1,342.

The good news is that as option traders we're not wed to bullish trades. We can get bearish, or market neutral, just as easily as we can go long.

Tomorrow, I'm looking for some bearish credit spreads.

Christopher Smith
TheOptionClub.com

SPX Selling Off and Implied Volatility Spiking

Wow! It's ugly out there. I'm looking at March, yes March, bull put credit spreads on the SPX.

What has changed?

Implied volatility has spiked with this morning's sell-off. The VIX is at 12.91, reflecting a desire in the market to buy put options.

Be cautious, however. This sell-off may be signaling a change in market direction, which is a dangerous time for us index credit spread traders. March options have just a bit more than a couple weeks left in them.

By the way, CROX is down but is still above our short strike.

Good trading!

Christopher Smith
TheOptionClub.com

Implied Volatility on the SPX and a down day for CROX

Today I am seeing some selling in CROX. It is hovering around its 20-day moving average and a scan of the news shows me nothing that raises concerns. The position remains open.

Back to the SPX, now. With implied volatilities so low, selling credit spreads is not the easy pickings we would prefer. For us, March is a closed chapter. April's expiration is less than 60-days away, so we can start looking there.

Because we are selling additional time, make sure you receive an additional reward for extending the time horizon. I have looked at the chain and the premiums are not particularly rich right now. The SPX is off a bit more than 4 points today, but the VIX still remains low at 10.43.

Christopher Smith
TheOptionClub.com

Credit Spread Trading Update

A little downside in the market this morning. Nothing concerning and it seems that the selling has subsided.

I am still standing aside this month on the SPX credit spread strategy. I am not seeing anything compelling, and there are opportunities elsewhere that better justify the risk. We are already up for the year, so we will still be finishing the first quarter showing solid profit.

The volatility is better in some of the individual stocks. While this blog is primarily concerned with index trading, I have elected throw in some other material because it is important to realize that you do need to be flexible as a trader.

Good trading!

Christopher Smith
TheOptionClub.com