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Posted by Martin February 26, 2015
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SPX expected move for February 27, 2015


Once again investors in Wall Street freaked out about oil and continued selling energy stocks. That would affect our put spread positions in OXY, LGCY, and EVS, which sold hard today. But these trades are a long term trades and thus today’s sell off is not a concern to me. They can freak out as much as they want in Wall Street about oil. I know, oil will not stay this low forever and well established companies such as those mentioned above will go up again.

And it can happen even next month.

What I do care about is my weekly position in SPX. We have a bull put spread open and that trade is set to expire tomorrow. In order to profit from this trade, the market must stay above 2085 by the end of tomorrow’s trading session.

From current levels, the market would have to drop by 25 points. Is this realistic? I believe it is not given the current volatility level.

The only catalyst which may move the market significantly down is tomorrow GDP reporting.

There can be two scenarios with the GDP:
 

  • the results will be good and markets will cheer it up
  • the results will be good, but the market sells off due to a fear that good results may prompt FED to raise rates earlier (although Yellen assured everybody on Wednesday that this wouldn’t happen)
  • the results will be bad and the market sells off due to renewed economic worries
  • the results will be bad and the market goes up because that will hold FED from raising interest rates

So, as you can see, no one knows what would be the outcome, only crazy investors and traders at Wall Street will know and tell us via a price action of the SPX.
 

So here is my view where the market may end up tomorrow (of course, this is not a 100% guarantee that it really happens, but statistically more probable).

SPX expected move

How to read this chart:
 
– The grey box indicates the boundaries where I expect the market to stay next day
– The horizontal magenta long-dashed lines are bearish levels, the second lower line would be a normal max low level, the third lower level is considered as extreme move
– The horizontal yellow long-dashed lines are bullish levels, the second higher line indicates a normal move, the third upper line an extreme move.
– The cyan line is the mean level, where the market would tend to return from extremes
– The long-dashed red line is the same mean level as the cyan one, but for the entire week, while cyan line is for the next day only
– The short-dashed yellow and green lines are the same levels as the long-dashed, but for the entire week, while long-dashed are for the next day
– The lines with a price tag indicates an open trade, the solid line is the critical position. The trade must stay above or below this line (depending on the trade)
– The dashed line with a price tag is a protective option
 
 






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Posted by Martin February 25, 2015
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SPX expected move for February 26, 2015


I would like to start posting this series of my market expectations, but at this point, I am not sure how consistent I will be able to be in publishing this series.

My intent to publish the charts below is to show where the market may go during the day in relation to my weekly options I trade against SPX. It sets the boundaries for the day and not the direction. It may go up or it may go down. The goal is to determine how safe my trade would be until expiration.

For example, now we have a trade out there – a bull put spread 2080/2085 against SPX. With my expected move for tomorrow, this trade should be safe. Of course it may change, we may see some ultra bad news, or investors freaking out for no particular reasons and all bets will be off. The market may move lower than my expectations. But that would be a statistical extreme if that happens. So there would have to be a real strong catalyst to move the market beyond those boundaries. See the chart below:

SPX expected move
 
 

How to read this chart:
 
– the grey box indicates the boundaries where I expect the market to stay next day
– the horizontal magenta long-dashed lines are bearish levels, the second lower line would be a normal max. low level, the thrid lower level is considered as extreme move
– the horizontal yellow long-dashed lines are bullish levels, the second higher line indicates a normal move, the third upper line an extreme move.
– the cyan line is the mean level, where the market would tend to return from extremes
– the long-dashed red line is the same mean level as the cyan one, but for the entire week, while cyan line is for the next day only
– the short-dashed yellow and green lines are the same levels as the long-dashed, but for the entire week, while long-dashed are for the next day
– the lines with a price tag indicates an open trade, the solid line is the critical position. The trade must stay above or below this line (depending on the trade)
– the dashed line with a price tag is a protective option
 
 

I will try to be publishing this trade on a daily basis from Wednesday to Friday during the week when we will have a weekly options trade open against SPX. If there will be no trade open during a particular week, I will not be publishing this chart.
 






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Posted by Martin February 23, 2015
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Bloggers and my blogroll


Over time I made a few friends recruited from dividend and options trading bloggers. Some had great blogs and I could learn a lot from them.

I could learn not only about investing, but also about blogging. It was a great community. But recently I noticed many of those great blogs were dormant. Some said good bye, some just stopped without a single word.

I understand that blogging may be time consuming work. Nevertheless I am sorry to see these bloggers go.

This has an impact to my blog too.

I decided to stop linking to the inactive blogs and remove them from my blogroll. That means I will remove any blog from my blogroll, which is silent for more than 6 months.

inactive bloggers

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Posted by Martin February 22, 2015
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SPX in unique chance to end extremely high next week


Last Friday was a significant trading day. At first, the stock market was falling on Friday morning making the recent breakout a false one. The market was returning back to the sideways channel.

Later during the day it recovered a bit, but still continued sideways. At 10:30 am the market started going up and created a new all-time high (ATH). See the Friday trading:

SPX Friday trading

If the market returned back to the channel, we could see the market to fall in coming days or weeks. It could be once again being range bound and it could fall back down to 2000 level.

It didn’t happen and the market has risen up to all time high making Friday a confirmation day:

SPX breakout

The chart above clearly shows the candle as a confirmation.

How do we determine whether it was a breakout confirmation or not? The body of a candle must close above the previous breakout candle. The breakout occurred on February 13 (see the chart above approx. 4 candles ago). The next day we had a confirmation candle, but it was somewhat weak to me. Friday was definitely a decisive confirmation.

Now, the channel’s resistance becomes a support and we may expect a new bull uptrend. There is nothing which could stop this market from going higher. How high and how steep grow will be is only determine by statistics and political or economic events which still may stop this market from going higher.

What do I expect from SPX this week?

I am bullish for the next week and expect SPX going up. However, Friday’s trading created a unique situation for this market. Because we saw a week low and week high to be the exact same as Friday’s low and high, now there is a great chance that the market ends up in either extreme high or extreme low which is statistically normally unlikely.

SPX expectations

In the upcoming week I plan on taking bullish trades, such as bull put spreads against SPX. I will determine the exact strikes upon tomorrow trading if it confirms my expectations for the trend direction.
 






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Posted by Martin February 22, 2015
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Is S&P 500 going to crash this year?


In recent months we kept reading in media that the market crash or major correction is imminent. Many people believe and preach it. Many websites having polls installed indicate bearishness. Many advisers advocate cautious and moving money into cash.

Are you also concerned about the market crashing this year?

There are two factors which may affect the market this year – FED rising interest rates and what’s happening around the world, mainly in Europe. And Europe on the other hand may affect FED’s decisions in rising interest rates.

Let’s take a look at rising interest rates and why I think they will affect the stock market positively

There is one investment vehicle competing with stocks market – bonds. Bonds are a very interest rate sensitive instrument and people consider it as a safe investment while it no longer is. Bonds and interest rates are inversely related meaning that when interest rates go up, bond value goes down and vice versa, when interest rates go down, bonds are becoming more expensive.

If we agree on this relationship:

  • interest rates up = bonds down
  • interest rates down = bonds up

Then once FED starts rising interest rates all bonds sold while interest rates were low would start losing value rapidly forcing investors selling them with a loss or holding them until maturity for whatever return it is paying.

But rising rates will not save bonds. If FED raises interest rates in several steps and not only once in one big jump, all bonds issued in the meantime will become also less valuable. In other words, if now we enjoy zero interest rate and FED increases it to 0.25%, later to 0.50%, later to 1%, and later to 1.50% then all bonds sold during 0.25%, 0.50%, and 1% rate environment will be already at loss.

Would you buy an inevitably losing investment? You will be buying high and selling low. Unless you decide holding for example a 30 year bond for 30 next years until maturity.

In my opinion, whatever it matters, bonds will suffer a sell off when FED increases interest rates and moving money into the stock market. And the big investors know this. That’s why they may push the stock market lower at the beginning to scare retail investors from selling their bonds and moving them into the stock market. So, if stocks drop, buy. I bet it will be only a temporary dip.

Many retail investors have it backwards with bonds. In 2008 when we suffered big losses in the stock market, investors were selling their stocks at a loss and movi9ng their money to “safety” – bonds at the time when interest rates were dropping. Now they will be ripped off again when the rates start rising.

Negative rates in Europe will affect the stock market positively too

Imagine a situation that you go to your local bank and purchase a money market account, certificate of deposit, or just open a savings account, deposit $50,000 and the bank will charge you 0.50% interest rate annually instead of paying you.

And that’s exactly what’s happening in Europe today. Banks and institutional investors in Europe have trouble to place the enormous surplus of money in the market. In other words, they do not know what to do with it and where to invest.

Therefore they came up with a negative interest rate to discourage people and banks to save money among themselves. They no longer want your money. It is not certain whether this measure would work in a long term yet some banks started charging the negative rate. Among the banks which accepted this procedure are banks in Germany, Denmark, or Switzerland.

In November 2014 a German Commerzbank announced that they would start charging a negative interest rate to its most valuable and biggest clients such as insurance companies, industrial companies or mutual funds.

The reason behind negative interest rates is to force people to use the money and not to stash them in a bank. Central banks want local banks to use money for lending, investing, and people spending their cash.

Below see a chart indicating what’s happening in Europe:

Euribor
Source: Reuters

If central bankers have problem with money surplus already, imagine what ECB’s decision to start QE and printing more money would do to this problem. Again, in my opinion, this will have a positive effect to the stock market in the US. If the negative interest rates will have the expected effect and force banks and institution to use the money, then they will go to the US market.

Why the US market? If they claim now that they have no other way to invest in Europe, the US market would be the second choice.

These are signs why I think we will not see the US stock market to fail this year and that we actually will see yet another bull run up similar to 2013 or 2014 one.

 






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Posted by Martin February 21, 2015
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Sold second AAPL bull call spread for 158% profit


As I mentioned yesterday in my Apple post I had another bull call spread against AAPL with expiration next week. I closed the first one on Thursday to avoid partial assignment for a great profit of 236%. Today I closed the second trade for another great profit of 158.77%.

This second trade wasn’t as easy as the first one and I had to roll it more often. I was right with the stock move, I wasn’t right with time.

Originally, I opened this trade in November 2014 with December expiration and these strikes:

STO 1 AAPL December 19 2014 125 Call
BTO 1 AAPL December 19 2014 120 Call

The stock didn’t grow up as I anticipated and as actually happened with the first trade too, so I had to roll the trade to give it more time to work. I had to roll this trade twice during its life span. The last rolling I had to lower and widen the spread in order to keep it profitable. See my trade tracking spreadsheet what I did with it:

AAPL trading book

Today morning the SPX market stalled for almost the entire morning. At the opening it fell hard, later recovered, but continued sideways until about 10:30 AM. I decided to take the profit rather than waiting until next week and risk that AAPL may reverse and start going back down.

Although I could make $493 if I waited until next week I thought it could be better to take the profit earlier rather than waiting and risk the entire profit of $371 already made. Another reason for bailing out earlier was that Apple had a nice run up for a while and the odds of a pullback increased significantly.

AAPL trend

One thing I learned about debit spreads. They may be better profitable than debit spread, their risk reward ratio may be better, but managing debit spreads is really harder if they go against you.

And I think, 158% profit is still quite good, don’t you think?
 






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Posted by Martin February 19, 2015
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AAPL Bull Call Spread finished with 236% gain!


I do not see a gain in hundreds percent level too often. Many of my trades usually end up between 6% to 50% range. This time a scored a big win with my Apple (AAPL) bull call spread I opened at the beginning of December 2014.

Apple is a company which is making money. It is a money cow, money making machine. Yet you see many investors trashing this company ignoring reality. I spot a great opportunity taking a debit spread against AAPL in December and decided to take it.

But it wasn’t an easy ride whatsoever. At some point, this trade looked like a disaster (most of January) when investors and traders were selling the stock. And at some point, I was even doubting my thinking about this stock. Many times I had to repeat myself to stay calm and give the stock (company) time to prove itself.

So I decided to act and opened a bull call spread trade:

STO 1 AAPL February 20 2015 130 Call
BTO 1 AAPL February 20 2015 125 Call

@ 2.23 LIMIT DEBIT

The stock was moving up fast and strong and I expected it moving even higher. But then the stock stalled and a sell off started. That was when my fear of getting in a trade at a very top came in and pressed me until the company announced its incredible earnings. Actually I found what AAPL may report on the internet earlier than that as someone was writing that they would report around 70 billion dollars earnings for the fourth quarter only (which is the same amount as the entire 2013 year).

After that the stock started recovering and my only concern was whether I gave the stock enough time or not to show its power.

AAPL

I paid $223 for this spread and my potential gain was $770.00 (334.78%). But since expiration for this trade was approaching fast (this Friday) and I am not sure whether the stock will be able to get to those highs I decided to close the tyrade earlier and take $526 profit (236%) instead.

I still have yet another AAPL trade expiring next week (119/125 bull call spread) which is in good shape too and is about to make another $371 as of this writing.

 






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Posted by Martin February 16, 2015
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S&P 500 futures collapsed. If it doesn’t recover by tomorrow, markets will open down.


The news came in. Greece refused to apply for a bailout plan extension considering it “unacceptable”. This is sending dollar higher against Euro and S&P 500 futures just collapsed from last Friday’s new all-time high:

SPX futures

Although there is still plenty of time for the futures to recover (until tomorrow morning when the US markets open) this indicates that the US market would open low.

If the downtrend continues, we may see a failed breakout confirmation (as I wrote yesterday, on Friday, we saw a breakout thru the last resistance at 2093 level). Failing to confirm the breakout would mean that the market would return back down below the resistance level and most likely continued on the downward move.

If that happens we may see it falling back down to 2000 level (not in one day, but in a week or two).

All indicators I use however point to bullish trend, so this collapse in futures may be temporary. Even if the markets open down on Tuesday, it may recover by the end of the day.

Let’s wait for tomorrow and see what SPX wants to do. Based on that we will open a new trade against SPX. If the market shows indecisiveness, we will skip the trade until we know the direction or until the next week.

Happy trading and investing!
 






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Posted by Martin February 15, 2015
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Market outlook for the next week


On Monday markets will be closed due to President Day observation. For this week we will see a short trading. However, the most important trading happened last week.

In my previous market outlook post I wrote about two patterns the market was about to attack – a wedge pattern and sideways channel.

Last week, the market broke up thru both patterns. It confirmed the break out the next day and marched up to its first resistance at 2094.

It smashed that resistance and create new all-time high!

We now need a confirmation for this break out and I am expecting this to happen next week. Well, to be clear, I am not expecting the confirmation to happen since I do not know whether it happens or not. I am expecting that the market will attempt to confirm it or fail it.

If the market confirms this break out we will have doors open to a new, strong bull run up. As one trader once mentioned, even bulls would be surprised by this bull trend.

If we fail to confirm this break out, the market may fall back down to 2000 level.

What is my bet on this? Since we broke two previous patterns, I would say we have a great chance to break this last resistance too.

This is changing my weekly bearish outlook to a bullish one. Long term, I am still bullish. Now I am bullish short term too.

What is my outlook for the next week?

Let’s take a look at the chart below:
 

SPX

Although everything can happen, I expect the market to continue going up. Tuesday trading may tell us the story, whether the week will be more bearish or bullish. We may see a pull back, we may see a new run up creating new ATH (all time high).

Nevertheless, I expect the market to move in the 2083 – 2104 range, unless unexpected bad or extremely good news override this expectation and move the market to its extremes.

Happy trading and investing!






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Posted by Martin February 12, 2015
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SPX 2005/2010/2105/2110 Iron Condor in good shape to expire


This morning I opened a new trade – Iron Condor against the S&P 500 (SPX). My strikes are 2005/2010 puts and 2105/2110 calls. I collected $30 credit for this trade. Although there are still two days left until expiration the trade is in good shape to expire worthless.

With Iron Condor you want the underlying to stay between the two spreads. An Iron Condor consists from two spreads – a bear call spread and bull put spread. As with a bear call spread, you want the price of underlying to stay below your short call strike. Same with the bull put spread, you want the underlying to stay above the short put strike.

The above trade is constructed of the following legs:

Long 2110 call option
Short 2105 call option

Sooo, you want the underlying (in this case SPX) to stay here.

Short 2010 put option
Long 2005 put option

So, if the stock (SPX) stays between 2010 put – 2105 call, the trade expires worthless for full profit of the entire collected credit.

Will SPX stay between strikes making this trade a winning one?

Although there are two days left until expiration and the trade is in a good shape, everything can happen. We can see the market rallying like crazy this last two days and smash the call side of the Condor, or we can see a frantic sell off falling thru the put side.

If that happens, then I will have to deal with it and roll the endangered side or even close it for a loss. What are my expectations then?

SPX Iron Condor

As you can see from the chart above, the trade has more risk to the upside. The market must run only 37 points up to endanger the call side. That’s 18.5 point every day. And that is not something too unusual. For tomorrow, the expected move is 19.34 points up or down!

See for yourself:

SPX expected move

So, hope that the market stays flat as it was so far and there will be no violent move to the upside. If any violent moves should occur, let’s be it to the down side. The stock market would have to fall by 58.53 point in two days which is less likely.

If this trade expires then I will realize a nice profit of 6.4%.
 
 






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