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Copyright © 2008 Trading Options For Income. All rights reserved
Madeira Investments LLC
D/B/A Trading Options For Income
8770 Sunset Drive # 201
Miami, Florida 33143
Tel: 786-462-5616
Fax: 305-279-0532
Copyright © 2008 Trading Options For Income. All rights reserved
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Why Trade Option Spreads?
If we were to reduce the idea of a spread to its most basic or essential characteristic, it would have to be its use of two option contracts, known as the legs of the spread. Using two legs simply means that we are combining, for example, a call option that you buy (sell) with a call option that you sell (buy). Therefore, you are taking both sides of the market in all spreads (buying/selling or selling/buying).
Option spreads have some major advantages over individual strategies. In fact, the full power of options as a trading vehicle doesn't really become known until you develop a good understanding of the workings of spreads. Most importantly, the selling side of option spreads has the greatest potential because you can profit from both time value decay and leverage of holding a long option in, for example, a diagonal spread. Even if using debit spreads, however, there are excellent hidden advantages mostly overlooked by novice traders. Certain debit spreads, for instance, can give you the ability to profit from time value decay (on a short out of the money leg) and potentially gain on the long side (from an in-the-money leg).
The advantage with the in the money debit spread is that you can cover the short option with a long in-the-money option instead of holding the stock itself, which entails much greater risk. And reducing risk is really what spreads are all about.
What we can't do...
We are not financial advisors. We cannot provide any advice as to whether or not options or our trading ideas are a suitable investments for your particular financial situation. We are in the business of publishing our trade ideas and market analysis only. We highly recommend that our subscribers review their trading allocation with a qualified registered financial advisor/planner. Everyone trading or planning to trade options should read the Characteristics and Risks of Standardized Options. A link to this document is posted at the very bottom of this page.
How much does our subscription cost?
No contracts, no long term commitments. You are automatically billed every month and if you decide to cancel your membership, do so prior to your next billing date and you will owe us nothing!
$59.00 per month! Discounts for quarterly, semi-annual and annual subscriptions click for more info
Why Trade Option Spreads?
If we were to reduce the idea of a spread to its most basic or essential characteristic, it would have to be its use of two option contracts, known as the legs of the spread. Using two legs simply means that we are combining, for example, a call option that you buy (sell) with a call option that you sell (buy). Therefore, you are taking both sides of the market in all spreads (buying/selling or selling/buying).
Option spreads have some major advantages over individual strategies. In fact, the full power of options as a trading vehicle doesn't really become known until you develop a good understanding of the workings of spreads. Most importantly, the selling side of option spreads has the greatest potential because you can profit from both time value decay and leverage of holding a long option in, for example, a diagonal spread. Even if using debit spreads, however, there are excellent hidden advantages mostly overlooked by novice traders. Certain debit spreads, for instance, can give you the ability to profit from time value decay (on a short out of the money leg) and potentially gain on the long side (from an in-the-money leg).
The advantage with the in the money debit spread is that you can cover the short option with a long in-the-money option instead of holding the stock itself, which entails much greater risk. And reducing risk is really what spreads are all about.
What we can't do...
We are not financial advisors. We cannot provide any advice as to whether or not options or our trading ideas are a suitable investments for your particular financial situation. We are in the business of publishing our trade ideas and market analysis only. We highly recommend that our subscribers review their trading allocation with a qualified registered financial advisor/planner. Everyone trading or planning to trade options should read the Characteristics and Risks of Standardized Options. A link to this document is posted at the very bottom of this page.
How much does our subscription cost?
No contracts, no long term commitments. You are automatically billed every month and if you decide to cancel your membership, do so prior to your next billing date and you will owe us nothing!
$59.00 per month! Discounts for quarterly, semi-annual and annual subscriptions click for more info
How Are Options Priced?
A question asked by many novice options traders is: How is an options contract priced? Obviously knowing what the value of what you are buying or selling is crucial to a successful trade. The basic model for options pricing today is the Black-Scholes Model developed in 1973 by Fisher Black, Myron Scholes and Robert Merton. The model is widely used today and is regarded as one of the best ways to determine the “fair” price of an options contract. Click here to read full article
When Delta Neutral Isn't Enough!
We have had several inquiries regarding the concept of Delta Neutral options strategies so I wanted to clarify one important aspect of “neutral” trading” that goes overlooked by many options traders. The recent surge in implied volatility has confirmed that constructing Delta neutral strategies really don’t serve the purpose unless the strategy is Gamma neutral as well. Many traders in strategies such as Iron Condors and other neutral strategies don’t quite understand the fact that a position that may start out as delta neutral can quickly take on directional bias ie: directional risk , with large moves in the value of the underlying security or a spike in implied volatility. lick here to read full article
Theta...Father Time!
We wrote an article some time last year regarding “Theta” and its impact on our type of strategies. I believe it is worth reviewing again as this important piece of the theoretical options pricing model addresses a very important component in Credit strategies such as Iron Condors and Bull Put/Bear Call spreads. Click here to read full article
Implied Volatility 101
The most misunderstood component of options pricing is implied volatility. Successful options traders understand that implied volatility is the key "ingredient" to making proper trading decisions when buying and selling options and options spreads. Volatility in regards to options is measured two fold. The first and most easily understood is called Historical or Statistical volatility. Statistical volatility simply is the volatility of a financial instrument based on historical returns. Statistical (historical) volatility as the name implies, refers to past actual data.Click here to read full article
Vega, The "Non-Greek" Greek!
Vega is often referred to as the “non-greek” in the options pricing model. Non Greek because Vega is not actually a Greek letter like delta, gamma, theta and rho. In many educational books it is referred to as Kappa instead but for practical purposes and because the trading world refers to it as Vega, we will as well.
Vega represents a measurement of change in options premium relative to a 1% change in implied volatility. As I mentioned before, implied volatility is different from historical or statistical volatility in that it is an indication of a future event which may or may not occur whereas historical volatility is fact. It is important to understand the concept of implied volatility in order to understand vega. Vega takes that subjective “implied” volatility factor and expresses it in real figure that affects the “dollars and cents” of an option. Click here to read full article.
The Fear Indicator...VIX!
The VIX was introduced in 1993 by the Chicago Board Options Exchange (CBOE). The index was originally designed to measure the markets expectation of 30 day volatility of the OEX the S&P 100 index. The index originally measured expectations of implied volatility by evaluating prices on at the money options prices in the OEX and deriving a level of expected volatility. In 2003 the VIX was modified by the CBOE and Goldman Sacks to the broader S&P 500 SPX index. This new formula encompasses a wider range of puts and calls over a wider range of strike prices. The new improved configuration estimates expected 30 day volatility by averaging the weighted prices of near and next term put and call options in the 1st and 2nd contract months. Options used in the calculation must have at least 1 week to expiration and when these near term options reach 1 week to maturity the VIX rolls to the 2nd and 3rd expiration months. Click here to read full article
What Are Delta Neutral Spreads?
Delta neutral refers to a position or portfolio which has an overall Delta value of zero or very close to zero. This means that the portfolio does not react to small changes in price of the underlying assets.
When a position or portfolio is delta neutral, not only does it not react to small changes in the price of the underlying asset, it is also able to profit when the underlying asset breaks out in price, no matter to upside or downside. Yes, profiting both to upside and downside.
Delta neutral is especially useful in options trading when positions are set up to take advantage of time decay. When a position is designed to profit through time decay, it needs to react as little as possible to changes in the underlying asset as possible. In order to do so, a concept known as dynamic hedging is used where the overall delta value of the position is rebalanced whenever it moves out of neutrality.
Delta neutral hedging can be attained using options, futures, stocks or any combination of them. Delta neutral positions are often held by market makers since their main aim is to profit by trading at a spread - rather than earning a return on their position.
A question asked by many novice options traders is: How is an options contract priced? Obviously knowing what the value of what you are buying or selling is crucial to a successful trade. The basic model for options pricing today is the Black-Scholes Model developed in 1973 by Fisher Black, Myron Scholes and Robert Merton. The model is widely used today and is regarded as one of the best ways to determine the “fair” price of an options contract. Click here to read full article
When Delta Neutral Isn't Enough!
We have had several inquiries regarding the concept of Delta Neutral options strategies so I wanted to clarify one important aspect of “neutral” trading” that goes overlooked by many options traders. The recent surge in implied volatility has confirmed that constructing Delta neutral strategies really don’t serve the purpose unless the strategy is Gamma neutral as well. Many traders in strategies such as Iron Condors and other neutral strategies don’t quite understand the fact that a position that may start out as delta neutral can quickly take on directional bias ie: directional risk , with large moves in the value of the underlying security or a spike in implied volatility. lick here to read full article
Theta...Father Time!
We wrote an article some time last year regarding “Theta” and its impact on our type of strategies. I believe it is worth reviewing again as this important piece of the theoretical options pricing model addresses a very important component in Credit strategies such as Iron Condors and Bull Put/Bear Call spreads. Click here to read full article
Implied Volatility 101
The most misunderstood component of options pricing is implied volatility. Successful options traders understand that implied volatility is the key "ingredient" to making proper trading decisions when buying and selling options and options spreads. Volatility in regards to options is measured two fold. The first and most easily understood is called Historical or Statistical volatility. Statistical volatility simply is the volatility of a financial instrument based on historical returns. Statistical (historical) volatility as the name implies, refers to past actual data.Click here to read full article
Vega, The "Non-Greek" Greek!
Vega is often referred to as the “non-greek” in the options pricing model. Non Greek because Vega is not actually a Greek letter like delta, gamma, theta and rho. In many educational books it is referred to as Kappa instead but for practical purposes and because the trading world refers to it as Vega, we will as well.
Vega represents a measurement of change in options premium relative to a 1% change in implied volatility. As I mentioned before, implied volatility is different from historical or statistical volatility in that it is an indication of a future event which may or may not occur whereas historical volatility is fact. It is important to understand the concept of implied volatility in order to understand vega. Vega takes that subjective “implied” volatility factor and expresses it in real figure that affects the “dollars and cents” of an option. Click here to read full article.
The Fear Indicator...VIX!
The VIX was introduced in 1993 by the Chicago Board Options Exchange (CBOE). The index was originally designed to measure the markets expectation of 30 day volatility of the OEX the S&P 100 index. The index originally measured expectations of implied volatility by evaluating prices on at the money options prices in the OEX and deriving a level of expected volatility. In 2003 the VIX was modified by the CBOE and Goldman Sacks to the broader S&P 500 SPX index. This new formula encompasses a wider range of puts and calls over a wider range of strike prices. The new improved configuration estimates expected 30 day volatility by averaging the weighted prices of near and next term put and call options in the 1st and 2nd contract months. Options used in the calculation must have at least 1 week to expiration and when these near term options reach 1 week to maturity the VIX rolls to the 2nd and 3rd expiration months. Click here to read full article
What Are Delta Neutral Spreads?
Delta neutral refers to a position or portfolio which has an overall Delta value of zero or very close to zero. This means that the portfolio does not react to small changes in price of the underlying assets.
When a position or portfolio is delta neutral, not only does it not react to small changes in the price of the underlying asset, it is also able to profit when the underlying asset breaks out in price, no matter to upside or downside. Yes, profiting both to upside and downside.
Delta neutral is especially useful in options trading when positions are set up to take advantage of time decay. When a position is designed to profit through time decay, it needs to react as little as possible to changes in the underlying asset as possible. In order to do so, a concept known as dynamic hedging is used where the overall delta value of the position is rebalanced whenever it moves out of neutrality.
Delta neutral hedging can be attained using options, futures, stocks or any combination of them. Delta neutral positions are often held by market makers since their main aim is to profit by trading at a spread - rather than earning a return on their position.
"Trading Puts and Calls" is our sister newsletter dedicated to directional trading using in the money puts and calls. No spreads just individual options using our directional analysis on index ETFs!
What Are Vertical Spreads?
Vertical spreads, a strategy done with either calls or puts, involve buying one option and selling another option of the same type and expiration, but a different strike.
A "bull call" spread, for example, entails buying one call and selling a higher-strike, lower-priced call to offset some of the premium cost. This type of spread would be done for a debit. A "bear call" spread would entail selling the lower-strike call and buying a higher-strike call to hedge the risk. This would produce a credit in your account; cash will be held as a margin for the position.
Debit vertical spreads (bull call and "bear put" spreads) profit from a directional move. The position will succeed if the stock has moved past the bought strike plus the debit paid. For a full profit, the underlying needs to move beyond the sold strike by expiration.
Credit vertical spreads involving calls will make a full profit if the underlying is below the sold strike at expiration. The break-even is the strike plus the credit. Credit spreads using puts will profit if the underlying stays above the strike sold minus the credit.
Vertical spreads lose if the underlying moves in the wrong direction. The maximum loss for debit spreads is the debit paid. The maximum loss for credit spreads is the difference between the two strikes used minus the credit. This is also the amount of margin held by your broker.
Debit vertical spreads are used to offset the premium cost of the purchased option, especially when implied volatilities are high. This increases the probability of profit for the trade, but does limit the potential gains. Credit spreads are used when one wants to be a net seller of options, but wants to hedge the risk. Option selling can have a very high probability of profit, but also the potential for large losses, and using a credit spread limits that exposure.
What Are Diagonal Spreads?
You create a diagonal spread when you buy and write options (calls or puts, but not both in the same spread) on the same stock with different strike prices and different expirations
a diagonal spread usually involves the purchase of a longer-term call (or put) and the sale of a shorter-term call (or put) with a different strike. Because the deltas of these options with different strikes are usually not the same, these diagonal spreads have some sensitivity to the underlying stock as with standard one-to-one bull and bear spreads. Also, as with so-called long calendar spreads, these diagonal spreads tend to have a net time decay that is in the investor's favor. This is because a shorter-term option is likely to lose time value faster than a longer-term one, if the stock stands still.
diagonal spreads can offer a very attractive return on capital with only limited risk. As long as the option purchased expires later than the one written, the margin requirements on diagonal spreads are the same as for one-to-one bull and bear spreads. That is: if you buy the more in-the-money call (or put) and sell the more out-of-the-money call (or put), you do not need to post a margin since the net premium you paid represents your maximum loss. Alternatively, if you buy the lower premium out-of-the-money call (or put) and sell the higher premium in-the-money call (or put), you are required to post a margin equal to your maximum possible loss. This amount is the difference between the two strike prices times the number of underlying shares.
What Are Horizontal Spreads?
Horizontal Spreads, also known as Time Spreads or Calendar Spreads , are options spreads made up of options of the same underlying, same type, same strike price but different expiration months. Horizontal Spreads are named Horizontal Spreads because the options that are involved in a Horizontal spread are lined up horizontally on an options chain.
A horizontal spread is a bet that futures prices will trade in a very tight range over some time period. Profitability is based on the speed at which the time value of options deteriorates. The time value of an option close to maturity always deteriorates faster than the time value of options further to expiration, assuming all else equal. While we do not observe time value directly (it is the difference between the option’s premium and the intrinsic value), the time value has been found to be proportionate to the time to maturity.
Vertical spreads, a strategy done with either calls or puts, involve buying one option and selling another option of the same type and expiration, but a different strike.
A "bull call" spread, for example, entails buying one call and selling a higher-strike, lower-priced call to offset some of the premium cost. This type of spread would be done for a debit. A "bear call" spread would entail selling the lower-strike call and buying a higher-strike call to hedge the risk. This would produce a credit in your account; cash will be held as a margin for the position.
Debit vertical spreads (bull call and "bear put" spreads) profit from a directional move. The position will succeed if the stock has moved past the bought strike plus the debit paid. For a full profit, the underlying needs to move beyond the sold strike by expiration.
Credit vertical spreads involving calls will make a full profit if the underlying is below the sold strike at expiration. The break-even is the strike plus the credit. Credit spreads using puts will profit if the underlying stays above the strike sold minus the credit.
Vertical spreads lose if the underlying moves in the wrong direction. The maximum loss for debit spreads is the debit paid. The maximum loss for credit spreads is the difference between the two strikes used minus the credit. This is also the amount of margin held by your broker.
Debit vertical spreads are used to offset the premium cost of the purchased option, especially when implied volatilities are high. This increases the probability of profit for the trade, but does limit the potential gains. Credit spreads are used when one wants to be a net seller of options, but wants to hedge the risk. Option selling can have a very high probability of profit, but also the potential for large losses, and using a credit spread limits that exposure.
What Are Diagonal Spreads?
You create a diagonal spread when you buy and write options (calls or puts, but not both in the same spread) on the same stock with different strike prices and different expirations
a diagonal spread usually involves the purchase of a longer-term call (or put) and the sale of a shorter-term call (or put) with a different strike. Because the deltas of these options with different strikes are usually not the same, these diagonal spreads have some sensitivity to the underlying stock as with standard one-to-one bull and bear spreads. Also, as with so-called long calendar spreads, these diagonal spreads tend to have a net time decay that is in the investor's favor. This is because a shorter-term option is likely to lose time value faster than a longer-term one, if the stock stands still.
diagonal spreads can offer a very attractive return on capital with only limited risk. As long as the option purchased expires later than the one written, the margin requirements on diagonal spreads are the same as for one-to-one bull and bear spreads. That is: if you buy the more in-the-money call (or put) and sell the more out-of-the-money call (or put), you do not need to post a margin since the net premium you paid represents your maximum loss. Alternatively, if you buy the lower premium out-of-the-money call (or put) and sell the higher premium in-the-money call (or put), you are required to post a margin equal to your maximum possible loss. This amount is the difference between the two strike prices times the number of underlying shares.
What Are Horizontal Spreads?
Horizontal Spreads, also known as Time Spreads or Calendar Spreads , are options spreads made up of options of the same underlying, same type, same strike price but different expiration months. Horizontal Spreads are named Horizontal Spreads because the options that are involved in a Horizontal spread are lined up horizontally on an options chain.
A horizontal spread is a bet that futures prices will trade in a very tight range over some time period. Profitability is based on the speed at which the time value of options deteriorates. The time value of an option close to maturity always deteriorates faster than the time value of options further to expiration, assuming all else equal. While we do not observe time value directly (it is the difference between the option’s premium and the intrinsic value), the time value has been found to be proportionate to the time to maturity.
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Trading Options For Income is a subscription based options trading and market newsletter. We analyze and publish spread trading ideas using Index ETF options such as DIA, SPY, GLD, USO and IWM and many others. Our strategies range from bullish and bearish directional strategies such as diagonal and vertical spreads to market neutral strategies such as Iron Condors.
Trading Options For Income is a subscription based options trading and market newsletter. We analyze and publish spread trading ideas using Index ETF options such as DIA, SPY, GLD, USO and IWM and many others. Our strategies range from bullish and bearish directional strategies such as diagonal and vertical spreads to market neutral strategies such as Iron Condors.
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Market Update 2/25/2010
C.J. Mendes
The credit concerns in Europe are again making headlines not only on CNBC and Blommberg but on main street general news sources. The site of Greeks in violent protest has certainly spooked investors and rightly so. Couple that with a stronger dollar (or better said weaker Euro) Ben Bernanke on Capitol hill and President Obama's health care summit and what you get is a bunch of traders sitting around waiting on the sidelines.
The weak unemployment claims number is NOT what has spooked this market. Traders know that employment is weak and it will lag the recovery. What has traders spooked is first and foremost at the moment, the credit situation in Greece and then the political uncertainty here at home.
Gold is surprisingly strong today even while the dollar is firmer. We are seeing today some flight to quality in the Gold trade. We have seem it lately in terms of Gold denominated in Euro's but today, even Gold in dollar terms are catching investor's eyes. Fear is high and the VIX has been up by as much as 10% today. The roller coaster continues... Quite frankly there is a lot of conflicting "noise" today affecting the session's trading action and we won't see how traders are leaning until late in the session.
I mentioned that these low volume rallies tend to be plagued by traders using very tight stops (what I call one foot in and one foot out the door) and it does not take much to start a heavy down draft. But these downdrafts are usually limited in their nature and quick to turn around.
I believe we will close higher than where we are trading at the moment which is roughly down 170 points on the Dow Jones industrials.
C.J. Mendes
The credit concerns in Europe are again making headlines not only on CNBC and Blommberg but on main street general news sources. The site of Greeks in violent protest has certainly spooked investors and rightly so. Couple that with a stronger dollar (or better said weaker Euro) Ben Bernanke on Capitol hill and President Obama's health care summit and what you get is a bunch of traders sitting around waiting on the sidelines.
The weak unemployment claims number is NOT what has spooked this market. Traders know that employment is weak and it will lag the recovery. What has traders spooked is first and foremost at the moment, the credit situation in Greece and then the political uncertainty here at home.
Gold is surprisingly strong today even while the dollar is firmer. We are seeing today some flight to quality in the Gold trade. We have seem it lately in terms of Gold denominated in Euro's but today, even Gold in dollar terms are catching investor's eyes. Fear is high and the VIX has been up by as much as 10% today. The roller coaster continues... Quite frankly there is a lot of conflicting "noise" today affecting the session's trading action and we won't see how traders are leaning until late in the session.
I mentioned that these low volume rallies tend to be plagued by traders using very tight stops (what I call one foot in and one foot out the door) and it does not take much to start a heavy down draft. But these downdrafts are usually limited in their nature and quick to turn around.
I believe we will close higher than where we are trading at the moment which is roughly down 170 points on the Dow Jones industrials.
Market Update 2/26/2010
C.J. Mendes
The credit crisis in Greece abated somewhat overnight with news that the IMF may step in and provide some stop gap measures. Again this would be a band aid only and the financial issues plaguing the PIIGS countries will require long term fundamental remedies.
The USD is weaker today as the Euro firms up a bit and that is lending support to a slightly higher market. Gold is again higher today after rumors that the Chinese Government is going to buy the remaining 191 tons of Gold held by the IMF as part of a previously announced 403 ton sale. China has previously said that it will increase its holding of Gold substantially over the next few years. It lags most other industrialized nations in its holding of Gold and based on its stated intentions to ramp up holdings, it would not surprise me if the rumor came to fruition.
This morning we had a deluge of economic releases. GDP and Chicago PMI came in better than expected and the market took those numbers in stride. Next week we will get ISM manufacturing, ADP employment index, ISM services, the Beige Book and finally, the unemployment report.
The markets are taking a "snow day" today as trading is very light and should get even thinner this afternoon as those traders who did show up to work try to beat the crowds out the door. Next week we should continue the zig zag trading pattern we have seen now for several months as we wait for the next catalyst to move the market either way.
C.J. Mendes
The credit crisis in Greece abated somewhat overnight with news that the IMF may step in and provide some stop gap measures. Again this would be a band aid only and the financial issues plaguing the PIIGS countries will require long term fundamental remedies.
The USD is weaker today as the Euro firms up a bit and that is lending support to a slightly higher market. Gold is again higher today after rumors that the Chinese Government is going to buy the remaining 191 tons of Gold held by the IMF as part of a previously announced 403 ton sale. China has previously said that it will increase its holding of Gold substantially over the next few years. It lags most other industrialized nations in its holding of Gold and based on its stated intentions to ramp up holdings, it would not surprise me if the rumor came to fruition.
This morning we had a deluge of economic releases. GDP and Chicago PMI came in better than expected and the market took those numbers in stride. Next week we will get ISM manufacturing, ADP employment index, ISM services, the Beige Book and finally, the unemployment report.
The markets are taking a "snow day" today as trading is very light and should get even thinner this afternoon as those traders who did show up to work try to beat the crowds out the door. Next week we should continue the zig zag trading pattern we have seen now for several months as we wait for the next catalyst to move the market either way.
Market Update 3/01/2010
C.J. Mendes
The US equity markets are continuing the rally started in Chinese markets overnight and are posting solid gains for the session. Advancers at one point outpaced decliners by a better than 3 to 1 margin on good volume, a good bullish indicator. In the weekly market wrap up, I mentioned that the market seems very content with pushing higher as long as the situation in Greece does not spiral out of control.
The rumors from Europe seem to suggest that a combination of aid packages will be forthcoming to the Greeks from a variety of sources including other EU members, European banks and the IMF. Traders may be betting on the fact that the situation will be handled in a manner that will spare a spiraling downfall in the EUR.
This worst of these sovereign credit issues are still ahead of us but maybe a bit further down the road than previously anticipated by the markets. This week, Greece will try to access capital via a bond offering and obviously all eyes will be watching. The dollar has firmed up today and breaking from recent trends, equity markets are trading higher despite it. Gold is higher as well as OIL even on the back of the stronger dollar.
The fast rising 150 day moving average will continue to provide strong support to equity markets. We should continue to push higher at least until later in the week as traders begin to hedge their bullish positions going into Friday's Jobs report. Again the situation is very fluid and I am concerned that the VIX (19.30)may be indicating traders are a bit of complacent. If the "you know what" hits the fan concerning Greece et all, expect another furious move higher in implied volatility. Trade these rallies carefully.
C.J. Mendes
The US equity markets are continuing the rally started in Chinese markets overnight and are posting solid gains for the session. Advancers at one point outpaced decliners by a better than 3 to 1 margin on good volume, a good bullish indicator. In the weekly market wrap up, I mentioned that the market seems very content with pushing higher as long as the situation in Greece does not spiral out of control.
The rumors from Europe seem to suggest that a combination of aid packages will be forthcoming to the Greeks from a variety of sources including other EU members, European banks and the IMF. Traders may be betting on the fact that the situation will be handled in a manner that will spare a spiraling downfall in the EUR.
This worst of these sovereign credit issues are still ahead of us but maybe a bit further down the road than previously anticipated by the markets. This week, Greece will try to access capital via a bond offering and obviously all eyes will be watching. The dollar has firmed up today and breaking from recent trends, equity markets are trading higher despite it. Gold is higher as well as OIL even on the back of the stronger dollar.
The fast rising 150 day moving average will continue to provide strong support to equity markets. We should continue to push higher at least until later in the week as traders begin to hedge their bullish positions going into Friday's Jobs report. Again the situation is very fluid and I am concerned that the VIX (19.30)may be indicating traders are a bit of complacent. If the "you know what" hits the fan concerning Greece et all, expect another furious move higher in implied volatility. Trade these rallies carefully.
Market Update 3/02/2010
C.J. Mendes
The S&P 500 has crossed the 50 day MA today and if we can close above the 1125 level this week it would certainly be a good bullish indicator. Downside here is that the volume is weak and further study into the composition of the trading volume behind advancing and declining issues shows that the rally is not very well subscribed.
I place a lot of emphasis on volume in my technical studies. Any time/price signals without corresponding volume surge behind it are extremely prone to be false signals. Looking at the advance decline line on the NYSE we see 2156 advancers to 963 decliner or a bit better than a 2 : 1 ratio. Positive but not enough to move the market much higher today.
Volatility as measured by the VIX is extremely low and I am concerned with market complacency. Any bit of bad news can bring on swift downside moves when traders opt to not purchase insurance in the form of puts. Unlike what many traders believe, low volatility levels at times should not be read as "green light" but more like "yellow light"... Nonetheless from a trading perspective we should continue a grind higher and unless a credit event shakes up the market, the most probable path is higher at least for this week.
Speaking of credit concerns, there are rumblings out there regarding debt levels of the UK and Japan, which certainly should not come as a surprise to anyone as these two nations have carried large debt levels in relation to GDP for some time. The concerns regarding sovereign debt is something we will be dealing with for some time as a result of the global effort to reflate after the recent crisis. Too much debt and too many bailouts...
Gold is higher on the slightly weaker dollar as the world begins to price in a bailout of Greece. Yesterday we traded higher on a slightly stronger dollar and equities at least are beginning to show signs of wanting to decouple from the reflation pattern which means traders are may be starting to have faith in the fact that domestic earnings can, at this point in the recovery, offset any loss from the re-patriation of foreign derived corporate profits hampered by the stronger dollar.
We should grind higher for a couple more sessions until traders begin to hedge their bets going into the jobs report on Friday which may disappoint the market.
C.J. Mendes
The S&P 500 has crossed the 50 day MA today and if we can close above the 1125 level this week it would certainly be a good bullish indicator. Downside here is that the volume is weak and further study into the composition of the trading volume behind advancing and declining issues shows that the rally is not very well subscribed.
I place a lot of emphasis on volume in my technical studies. Any time/price signals without corresponding volume surge behind it are extremely prone to be false signals. Looking at the advance decline line on the NYSE we see 2156 advancers to 963 decliner or a bit better than a 2 : 1 ratio. Positive but not enough to move the market much higher today.
Volatility as measured by the VIX is extremely low and I am concerned with market complacency. Any bit of bad news can bring on swift downside moves when traders opt to not purchase insurance in the form of puts. Unlike what many traders believe, low volatility levels at times should not be read as "green light" but more like "yellow light"... Nonetheless from a trading perspective we should continue a grind higher and unless a credit event shakes up the market, the most probable path is higher at least for this week.
Speaking of credit concerns, there are rumblings out there regarding debt levels of the UK and Japan, which certainly should not come as a surprise to anyone as these two nations have carried large debt levels in relation to GDP for some time. The concerns regarding sovereign debt is something we will be dealing with for some time as a result of the global effort to reflate after the recent crisis. Too much debt and too many bailouts...
Gold is higher on the slightly weaker dollar as the world begins to price in a bailout of Greece. Yesterday we traded higher on a slightly stronger dollar and equities at least are beginning to show signs of wanting to decouple from the reflation pattern which means traders are may be starting to have faith in the fact that domestic earnings can, at this point in the recovery, offset any loss from the re-patriation of foreign derived corporate profits hampered by the stronger dollar.
We should grind higher for a couple more sessions until traders begin to hedge their bets going into the jobs report on Friday which may disappoint the market.
Market Update 3/03/2010
C.J. Mendes
Overnight the EUR staged a strong move higher and bounced above the $1.36 level. The bullish move of the Euro was predicated on the expectations or rumors that the bailout package for Greece would be forthcoming from the EU and not the IMF. New austerity measures were also announced cutting back salaries for government workers and raising the VAT (value added tax) to 21%. On the surface, that is what they need to do, lower expenditures and raise tax income. The concern building in Europe revolves around the fact that the Greeks have threatened to run to the IMF if they are not able to borrow at rates "comparable" to other European nations. If the Greeks opt to borrow from the IMF, it would hurt the Euro much more than if the package came from the European Union Itself. It would send a chilling message to the world regarding the unity and fabric of the European Union.
On the back of this EUR strength, the USD has weakened a bit and this is acting to boost commodities, Gold and Oil included. Equity markets continue to grind higher as traders continue to discount the fact that a remedy will come to at least avert a more serious financial meltdown in Europe. Again this as a fluid situation with the potential to be a real disaster for financial markets so caution should be exercised. The VIX is down to around 18.5 and in my opinion it signals some complacency to a potential downturn. As I have said before, traders have set tight stops on their positions as we navigate this crisis and any corrections will be swift. A point to consider when monitoring market moving news from overseas especially Europe or Asia, it is important to consider that if something happens it will more than likely happen after market hours here in the US and the potential for market opening "gaps" are great.
From a technical point of view, the market wants to go higher. These issues overseas are holding back the market from what should be a stronger and broader rally. We broke the 1120 resistance point and a close above 1125 should really jumpstart a broader market rally which will take us to challenge the recent highs.
The ISM services rose to 53 from 50.5 which was better than expected . The service sector comprises a huge portion of our economy and this number should also provide a good backdrop for a continuing rally. The Jobs number on Friday will be sliced and diced by the markets but I am not sure that even a slightly worse than expected number will cause the market to change direction. Obviously a huge miss can throw a bucket of cold water on the rally but I am not sure we will get such surprise.
Keep an eye on the Greeks and trade the rally carefully. This is not the time to fall in love with stocks but that doesn't mean we should be precluded from taking our favorites out for a quick spin...
C.J. Mendes
Overnight the EUR staged a strong move higher and bounced above the $1.36 level. The bullish move of the Euro was predicated on the expectations or rumors that the bailout package for Greece would be forthcoming from the EU and not the IMF. New austerity measures were also announced cutting back salaries for government workers and raising the VAT (value added tax) to 21%. On the surface, that is what they need to do, lower expenditures and raise tax income. The concern building in Europe revolves around the fact that the Greeks have threatened to run to the IMF if they are not able to borrow at rates "comparable" to other European nations. If the Greeks opt to borrow from the IMF, it would hurt the Euro much more than if the package came from the European Union Itself. It would send a chilling message to the world regarding the unity and fabric of the European Union.
On the back of this EUR strength, the USD has weakened a bit and this is acting to boost commodities, Gold and Oil included. Equity markets continue to grind higher as traders continue to discount the fact that a remedy will come to at least avert a more serious financial meltdown in Europe. Again this as a fluid situation with the potential to be a real disaster for financial markets so caution should be exercised. The VIX is down to around 18.5 and in my opinion it signals some complacency to a potential downturn. As I have said before, traders have set tight stops on their positions as we navigate this crisis and any corrections will be swift. A point to consider when monitoring market moving news from overseas especially Europe or Asia, it is important to consider that if something happens it will more than likely happen after market hours here in the US and the potential for market opening "gaps" are great.
From a technical point of view, the market wants to go higher. These issues overseas are holding back the market from what should be a stronger and broader rally. We broke the 1120 resistance point and a close above 1125 should really jumpstart a broader market rally which will take us to challenge the recent highs.
The ISM services rose to 53 from 50.5 which was better than expected . The service sector comprises a huge portion of our economy and this number should also provide a good backdrop for a continuing rally. The Jobs number on Friday will be sliced and diced by the markets but I am not sure that even a slightly worse than expected number will cause the market to change direction. Obviously a huge miss can throw a bucket of cold water on the rally but I am not sure we will get such surprise.
Keep an eye on the Greeks and trade the rally carefully. This is not the time to fall in love with stocks but that doesn't mean we should be precluded from taking our favorites out for a quick spin...
Market Update 3/04/2010
C.J. Mendes
Short term over bought conditions have the markets stuck in neutral. Traders are adopting a cautious stance ahead of the Jobs numbers due out tomorrow morning which could be a market mover. Many analysts had been predicting a turn around number for this month where we turn to actually creating a few thousand jobs as opposed to the shedding them. The recent snow storms may push that turn around a bit further out but consensus is that we will begin to turn the corner very soon.
The daily saga humorously referred to as the "Greek Drama" is again in full force. Another day another strike and/or work stoppage...The Dollar had softened somewhat overnight but has quickly reversed course and is now much firmer. The reflation dynamic that I have spoken about is still very much in force although lately it seems we need to see bigger moves in the currency trades to drive equity markets.
Gold also traded higher overnight and after the turn in the dollar, has also reversed course and is currently trading lower. Other commodities are fairing about the same posting small losses. Oil is also trading slightly lower although still above $80.00 a barrel.
Advancers and decliners are almost evenly split on the NYSE and NASDAQ and volume is very subdued. The 1125 level on the S&P 500 still hasn't been broken on a close in this snap back rally and the longer we fail to push above, the stronger this resistance becomes. The market may rally tomorrow on a benign Jobs number and get the market above 1125 but if not, we may go through a few trading sessions of consolidation of the recent gains and unwind oscillators. The situation in Europe will keep rallies subdued especially at these levels until we get more clarity on the course of action adopted by the EU.
C.J. Mendes
Short term over bought conditions have the markets stuck in neutral. Traders are adopting a cautious stance ahead of the Jobs numbers due out tomorrow morning which could be a market mover. Many analysts had been predicting a turn around number for this month where we turn to actually creating a few thousand jobs as opposed to the shedding them. The recent snow storms may push that turn around a bit further out but consensus is that we will begin to turn the corner very soon.
The daily saga humorously referred to as the "Greek Drama" is again in full force. Another day another strike and/or work stoppage...The Dollar had softened somewhat overnight but has quickly reversed course and is now much firmer. The reflation dynamic that I have spoken about is still very much in force although lately it seems we need to see bigger moves in the currency trades to drive equity markets.
Gold also traded higher overnight and after the turn in the dollar, has also reversed course and is currently trading lower. Other commodities are fairing about the same posting small losses. Oil is also trading slightly lower although still above $80.00 a barrel.
Advancers and decliners are almost evenly split on the NYSE and NASDAQ and volume is very subdued. The 1125 level on the S&P 500 still hasn't been broken on a close in this snap back rally and the longer we fail to push above, the stronger this resistance becomes. The market may rally tomorrow on a benign Jobs number and get the market above 1125 but if not, we may go through a few trading sessions of consolidation of the recent gains and unwind oscillators. The situation in Europe will keep rallies subdued especially at these levels until we get more clarity on the course of action adopted by the EU.
Market Update 3/05/2010
C.J. Mendes
Better than expected Jobs numbers and some sense of stability from Greece has the market solidly higher today. Advancers are besting decliners by a 5 to 1 margin and volume for advancers is higher at a 10 to 1 pace over decliners on the NYSE. Again not to sound like a broken record but overall volume is weak, surprisingly weak today once again.
We have been saying that the market has been showing signs of wanting to push higher and that the credit concerns in Europe had overshadowed a very good earnings season. As the crisis abates, if indeed it does, then I would expect the market will make another push higher.
The market is dissecting the jobs number and there are aspects of the release today to support economic arguments for both bulls and bears. The bears will hang on to the fact that we still lost 36,000 jobs and that January was revised higher, whereas bulls will say that we ONLY lost 36,000 and December was revised to lower by almost 50,000 jobs. I think there is a good chance that this months number will be revised higher come April and looking back it will be marked as the month where we turned the corner on Job losses. The trend is improving and there is no question about it.
Overnight the dollar firmed up against the Euro but the reflation trade is not in full effect today as commodities, Gold and equities are all higher at the moment. This dynamic should correct itself as we move on to the afternoon trading session and I would not be surprised if the dollar gave up some of the ground gained overnight.
I still am very concerned that we have not seen the worst out of the European credit crisis although we may have seen the worst from a market standpoint for at least the next few weeks or maybe even months. I do not believe that the current political structure in Greece will be able to deal with the tremendous pressure being exerted by the unions against the austerity measures. Even today as the Greek government approves austerity measures, several work stoppages have been called for by the unions and Greeks are out on the streets protesting in full force. The EU will certainly call for similar measures for Portugal, Spain and Italy.
Keep your size small, maintain tight stops and barring a meltdown in Greece, we will continue to head higher although a very short-term consolidation period at these levels is a real possibility. We will more than likely close above 1125 today and that opens the door to 1150 which is the recent high and potential for a move to challenge 1200.
C.J. Mendes
Better than expected Jobs numbers and some sense of stability from Greece has the market solidly higher today. Advancers are besting decliners by a 5 to 1 margin and volume for advancers is higher at a 10 to 1 pace over decliners on the NYSE. Again not to sound like a broken record but overall volume is weak, surprisingly weak today once again.
We have been saying that the market has been showing signs of wanting to push higher and that the credit concerns in Europe had overshadowed a very good earnings season. As the crisis abates, if indeed it does, then I would expect the market will make another push higher.
The market is dissecting the jobs number and there are aspects of the release today to support economic arguments for both bulls and bears. The bears will hang on to the fact that we still lost 36,000 jobs and that January was revised higher, whereas bulls will say that we ONLY lost 36,000 and December was revised to lower by almost 50,000 jobs. I think there is a good chance that this months number will be revised higher come April and looking back it will be marked as the month where we turned the corner on Job losses. The trend is improving and there is no question about it.
Overnight the dollar firmed up against the Euro but the reflation trade is not in full effect today as commodities, Gold and equities are all higher at the moment. This dynamic should correct itself as we move on to the afternoon trading session and I would not be surprised if the dollar gave up some of the ground gained overnight.
I still am very concerned that we have not seen the worst out of the European credit crisis although we may have seen the worst from a market standpoint for at least the next few weeks or maybe even months. I do not believe that the current political structure in Greece will be able to deal with the tremendous pressure being exerted by the unions against the austerity measures. Even today as the Greek government approves austerity measures, several work stoppages have been called for by the unions and Greeks are out on the streets protesting in full force. The EU will certainly call for similar measures for Portugal, Spain and Italy.
Keep your size small, maintain tight stops and barring a meltdown in Greece, we will continue to head higher although a very short-term consolidation period at these levels is a real possibility. We will more than likely close above 1125 today and that opens the door to 1150 which is the recent high and potential for a move to challenge 1200.
Market Update 3/08/2010
C.J. Mendes
Over the weekend, several EU officials released comments regarding the importance of keeping Greece and other EU members in financial peril from further market deterioration. The French in particular seem very determined to show the world that it views unity within the EU members as crucial to the future success of the union. Over the weekend, Portugal announced as well that they too will be adopting austerity measures in order to reduce their debt load.
As I mentioned last week, whether or not these measures will work and make an impact in the long run are a big question mark but nonetheless, on the surface the news is market friendly.
The economic calendar is quiet this week and there isn't much upcoming to dramatically impact the market. Domestic politics may get the bulk of the headlights this week with the administration making a full, all or nothing push to get health care reform and financial services reform legislation passed. These measures are certainly not market friendly and that may throw some cold water on the rally. President Obama is in Pennsylvania today speaking about health care reform and will make several other stops this week making speeches on this same subject. When Washington speaks, the market has chosen to err on the side of caution and move to the sidelines.
From a technical standpoint the market is very short term overbought after Friday's impressive gains which leads me to believe we may have a hard time picking up steam this week. We will more than likely consolidate some of these recent gains and very possibly slide down just a bit to test downside support at 1125.
C.J. Mendes
Over the weekend, several EU officials released comments regarding the importance of keeping Greece and other EU members in financial peril from further market deterioration. The French in particular seem very determined to show the world that it views unity within the EU members as crucial to the future success of the union. Over the weekend, Portugal announced as well that they too will be adopting austerity measures in order to reduce their debt load.
As I mentioned last week, whether or not these measures will work and make an impact in the long run are a big question mark but nonetheless, on the surface the news is market friendly.
The economic calendar is quiet this week and there isn't much upcoming to dramatically impact the market. Domestic politics may get the bulk of the headlights this week with the administration making a full, all or nothing push to get health care reform and financial services reform legislation passed. These measures are certainly not market friendly and that may throw some cold water on the rally. President Obama is in Pennsylvania today speaking about health care reform and will make several other stops this week making speeches on this same subject. When Washington speaks, the market has chosen to err on the side of caution and move to the sidelines.
From a technical standpoint the market is very short term overbought after Friday's impressive gains which leads me to believe we may have a hard time picking up steam this week. We will more than likely consolidate some of these recent gains and very possibly slide down just a bit to test downside support at 1125.
Market Update 3/09/2010
C.J. Mendes
The low volume grind higher continues today. Trade's, the few who seem to be willing to put money to work, are pushing the market to test the highs of the year at 1150.
Yesterday we had the lightest volume day so far this year and this is beginning to make some headlines. Persistent low volume for an extended period is not condusive to longer term sustainable gains. Much has been made of the fact that retail investors have not participated in the rally, which started exactly one year ago today, and this is clearly apparent in the reluctance of many to put money to work.
Volatility has been sucked out of the market. The VIX is sitting at around 17.50 and I don't believe we will get much of a spike unless we get a major market moving event. Funny how many traders refuse to buy "insurance" when the market is "healthy" and yet choose to pay substantially more for it way too late...
This week the economic releases are very light with only the jobless claims and retail figures due out. Neither should move the market. As I mentioned yesterday, the domestic political headlines have the potential to disrupt markets this week as rumblings regarding the Healthcare and Financial Services reform legislation make their rounds in the media.
These low volume, narrow markets can be treacherous. Stops are very tight and there is little room for error. The broad market is overbought but there does not seem to be any indication that we are ready to unwind oscillators. Overhead resistance is building at the 1150 mark and we should at least spin our wheels at that level for a few more trading sessions.
C.J. Mendes
The low volume grind higher continues today. Trade's, the few who seem to be willing to put money to work, are pushing the market to test the highs of the year at 1150.
Yesterday we had the lightest volume day so far this year and this is beginning to make some headlines. Persistent low volume for an extended period is not condusive to longer term sustainable gains. Much has been made of the fact that retail investors have not participated in the rally, which started exactly one year ago today, and this is clearly apparent in the reluctance of many to put money to work.
Volatility has been sucked out of the market. The VIX is sitting at around 17.50 and I don't believe we will get much of a spike unless we get a major market moving event. Funny how many traders refuse to buy "insurance" when the market is "healthy" and yet choose to pay substantially more for it way too late...
This week the economic releases are very light with only the jobless claims and retail figures due out. Neither should move the market. As I mentioned yesterday, the domestic political headlines have the potential to disrupt markets this week as rumblings regarding the Healthcare and Financial Services reform legislation make their rounds in the media.
These low volume, narrow markets can be treacherous. Stops are very tight and there is little room for error. The broad market is overbought but there does not seem to be any indication that we are ready to unwind oscillators. Overhead resistance is building at the 1150 mark and we should at least spin our wheels at that level for a few more trading sessions.