Options Trading Blog
Options Trading Tips and Strategies
Time of the Year to Get Bearish? (SPX, OIL, USD) 11.26.2012
KOTM appropriately pointed out that AAPL’s range, on that day, was 1.5 standard deviations away from the mean…indicating a powerful and unusual hammer for AAPL and subsequently the NDX…thus the SPX and the market. This move preceded a four-sigma day for AAPL. With all this bullish action however, has this recent bo=unce lasted too long and is it time to get short?
The US Dollar index has nice horizontal support from 11/2/12’s open. This day was a massive bull day for the USD index; the formerly mentioned day could prove to be support for the SPX bears. USD bullishness is supported by a rounded bottom and up trending 50-day moving average. Other futures chars, like crude oil, have similar patterns. Oil is also at the recent top if its trend channel, and its respective complication of moving averages are directly above it. Away from the technical prospective, there are also fundamental reasons the bears will tout about.
If there is one thing the mainstream media has covered and talked endlessly about, it has been the looming fiscal cliff. Fidelity cites that, “up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the end of 2012 or beginning of 2013. If they hit all at once, the impact could amount to as much as 4%-5% of GDP.” This could be a serious event for the market if the government does not deal with it appropriately.
History, however, is on the side of the bulls. The last week in November has been bullish historically on average, the mean being up 3.1% since 2003. This conflicts with other research KOTM has done. The average cyu.ber Monday, since 2003, has been down nearly 1% for the SPX and -0.8% for the NDX, but this is just one day and perhaps not an indicator for the whole week. Either way, the recently formed channel will be one more thing to watch.
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Cyber Monday Returns & Myths Since 2002 (AAPL, NDX, SPLS, EBAY & More) 11.23.2012
While the market, as measured by index products, was clearly bearish, some individual equities had counter trend moves. A general rule of thumb is that 80% of stocks move with the index, but depending on your sample set…this could vary. We chose to look at various major online retailers. The obvious include AMZN, EBAY, and AAPL. The subtle plays like SPLS and WMT are not as well known. SPLS, for example, had over 10 billion dollars in online sales in 2011, growth of nearly 4% in that area, and is raked second overall in total online sales…AMZN naturally being first.
Away from the fundamentals for a moment, for the statistics were interesting too. The average return is self-explanatory, but the R-squared is a statistical tool used to measure the degree of correlation between two items. Correlation analysis allows investors to make predictions about an asset by looking at how it reacts with other market variables. Specifically, the R^2 number, is used as a metric to measure how well outcomes can be predicted. Zero being weak and 1 being extremely strong. This can be valuable if one was doing a pair trade. The data suggests one should sell SPLS and buy AMZN for the best average result, however the R-squared was strong for both of these stocks.
AAPL again outperformed the SPX and NDX; this was similarly observed during the Black Friday exercise…link below.
http://www.keeneonthemarket.com/blog/1630-black-friday-myths-returns-spx-ndx-aapl-nke-sks-and-tgt-11-21-2012
Either way the data is interesting and something one should keep in mind.
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S&P Emini Pivot points for 11.23.2012
Apple & Google Pivot Points for 11.23.2012
Black Friday Myths & Returns (SPX, NDX, AAPL, NKE, SKS, and TGT) 11.21.2012
Given that the index products were slightly negative and AAPL/SKS were positive, one could potentially put on a pair trade. The statistic below the average is the R^2, this would be a key indicator for a pair trade
R-squared is a statistical tool used to measure the degree of correlation between two items. Correlation analysis allows investors to make predictions about an asset by looking at how it reacts with other market variables. Specifically, the number R^2, is used as a metric to measure how well outcomes can be predicted. Zero being weak and 1 being extremely strong.
This relates to pair trading. A trade like selling NDX and buying AAPL could hope for a weak R-squared…meaning, historically and statistically, the two products can move different ways…thus having the potential to have the short (NDX) down and AAPL (long) up (as they have proven on average historically)…or the opposite…for Mark Twain reminds us that there are, “Lies, damned lies, and statistics.” Statistics can be used to support a weak thesis.
Option volatility trades can also be made from this data.
If one was inclined to, the data suggests that the SPX, NDX, NKE, and TGT products do not move that much…so selling iron condors could be a potential trade. Either way, the data is interesting.
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S&P Emini & Unusual Option Activity Video Recap 11.20.2012
S&P Emini Pivot points for 11.21.2012
Apple & Google Pivot Points for 11.21.2012
Would you "like" FB, ZNGA, or GRPN? 11.20.2012
There is no question that FB is richly valued by traditional metrics, but the counter argument is that these are not traditional times and future prospects justify said valuation. Eloquent arguments can be made from either side, however while others are fighting lets try to make some money. FB is trading around $23 at last check. In order to have smooth sailing into the 7/27/12 earnings gap, FB needs to break and respect overhead resistance. The day of the formerly mentioned earnings had a high of $24.54; we can call that level 1. The following day FB opened at $24.04; our level 2. It is interesting to note that our level 2 resisted a recent gap up because of earnings on 10/24/12; indicating a strong ceiling and a selling opportunity. It is even more interesting to note that the high on Friday, 11/16/12, was pennies below our level 2, further strengthening our thesis.
Every time FB has made it up here in the sideways channel it has only taken a day or two to be promptly rejected. This may lead one to believe that price could break either way, and quickly. The ‘at the money’ straddle is trading for about $1.25 for the weekly, or about 5.3% of the stock. Given that the pattern may fail or take time to play out weekly options could be risky, but then again it only took five trading days for FB to move from $19 to $24. This could be partially explained by the 7% short interest in the stock and the fact that it is hard to borrow.
Similar names like GRPN and ZNGA have taken advice from AA, being perpetual earnings disappointers. FB probably should not be clumped into a basket with these stocks for FB is different, but then again that is what they all say.
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