By checking the relative prices of puts and calls, you can easily see if most people are positive or negative about the market. If call prices are higher than put prices, more people are obviously buying calls because they expect a higher market. And the reverse is true if put prices are higher. Where does the market stand today?
In spite of the recent upward movement of the market, sentiment continues to be bearish.
Terry
Market Sentiment is Still Negative: In one of our SPY portfolios, we have a short iron condor which will make a maximum gain when the June Options expire in about 3 weeks if SPY ends up at any price between $82 and $98 (it closed Friday at $92.53).
The downside shoulder of the short iron condor at $82 is $10.53 below the price of the stock while the upside shoulder at $98 is only $5.47 above the stock price.
Even though the 82 put is almost double the distance away from the stock price that the 98 call is, the 82 put is actually trading at a higher price ($.33) than the 98 call ($.31).
The put that is at a strike about $5.47 below the stock price (at the 87 strike) is trading at $.80, or more than double the call that is that far above the stock price.
This wide discrepancy between put and call prices demonstrates that the market is strongly pessimistic right now. Since we make the assumption that we do not know which way the market will go in the short run, we can benefit from this discrepancy. (Actually, we guessed that there was a slightly better chance of a higher than a lower market ahead, and we selected strikes for the short iron condor that tilted slightly toward the upside when we placed this spread two weeks ago).
In those two weeks, this portfolio has gained 12.6% after commissions, a good indication that our reading was better than the collective negative sentiment that exists in the market today.
This negative sentiment is what causes call calendar spreads being fall less expensive than put calendar spreads as we discussed last week.
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 7 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you.
Terry
It was a fairly light week for Wall Street. Economic news was sparse and trading volume came in lower than is typical for this time of year. The S&P, Dow, NASDAQ and Russell
finished the week higher 3.6%, 2.7%, 4.9% and 5.0%.
The first bit of market-moving information came on Tuesday with the release on the Consumer Confidence report. The reading came in at 54.9 which well above economists’ expectations of 42.6. It
was the largest jump in six years and the highest reading in over eight months. The market rallied 2.6% as a result of the better than expected reading.
"Consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, director of The Conference Board's Consumer Research Center.
The market held its gain well into Wednesday’s trading until approximately a half hour before the closing bell. A sharp sell-off occurred during the last half hour after what was considered by most a successful 5-
year bond notes offering. Mortgage origination sellers hedged their positions which caused the 10-year bond yield to move to 3.7% which was a new 2009 high. Higher bond yields due to higher borrowing
costs means that the government’s attempts to keep rates down to help out the ongoing economic recovery are in a sense undermined. As a result the S&P lost 1.9% on the day.
Thursday and Friday saw little in the way of economic reports and as a result of the lack of info the S&P gained 2.9% over the two day period. I guess no news is good news.
On the technical side of things the market is currently nearing an overbought state so if we officially push into a short-term extreme we should see a 1-3 day fade of the extreme.
Over the very short-term, the last trading day of May into the first two trading days of June has seen a positive return of 1.8% since 1970. Moreover, 74% of the last 38 years has finished with a positive return.
Other than the short-term seasonality there really isn’t much to bank on here. We are still well within the month-long range we have been stuck in and until we break out of this range I expect to see more of the same.
Overbought/Oversold as of May 29, 2009