Weekly Stock Option Trading Tips: June 14, 2010

This week I would like to offer something different. On Sunday I received an email from one of my subscribers in which he expressed his thoughts about the new Weekly options that are now available on four of the most popular ETFs (SPY, DIA, QQQQ, and IWM). He makes some interesting observations.

You might also check out how well he has done with his investments while following our options strategy.

Terry

Dear Dr. Allen:

I am just as fascinated about the sudden appearance of the weekly series, and I believe the possibilities and money making opportunities are not to be believed. During the past week I have done quite a bit of thinking and pen-to-paper analysis and come up with a few thoughts that you may find interesting and/or relevant, not necessarily in the order of importance:

As you indicated in your 6/12 report, I, too, have not found any mention of this new development anywhere in any media. On a selfish basis, this is good, because if everyone piled in, we would have to divide the pie into smaller pieces
It may be worthwhile to remember that while so many commentators like to talk about the big rebound in the market since March '09, from the October '09 expiration until now (just about 8 months), SPY is up less than 1% despite all it's crazy gyrations
I certainly hope the existence of these weeklys will be permanent and not an experiment by the CBOE. The broker's most likely hope so, since larger commissions will be generated. With regard to costs, I agree; they should not be the tail that wags the dog. In my (real life) business, I spend at least 50% of my gross on expenses; not nearly so much with trading spreads
Five week expiration months used to be physically painful; now I welcome them! One extra week of rolls/income!
When we had only the monthly expirations, in most months the hoped-for profit came in the last week when theta was at its apex; now EVERY week is an expiration week. Right now, I am up a bit since the 5/18 expiration, but by this time next Friday 6/18, barring any severe swings, I should end the month up 7 to 10%. I believe our chances for substantial gains every week are excellent because the constantly high theta would appear to overcome the wild swings in VIX that we have had in the past six weeks.
The possibilities that exist for Roth IRA's are breathtaking
I put on a few weeklys last week, and rolled them early on Friday morning, and I agree with your analysis that the time of day to roll is probably not too important. This is in particular relevant if one has several strikes; these days, what is an at-the-money roll at 10:00 AM could be $2 away at 3:30, and vice versa, so why bother to time it?
It will be interesting to monitor the amount that can be attained on rollovers when the VIX settles down again to the 20 range, if ever. It will most likely be less, but then again so will the cost of setting up new positions
Even though at the money strikes generate the most premium, I again agree that using diagonals will still give very acceptable results while still providing some room for the price swings of late

With these new developments and all the exciting possibilities, it is hard not to get too worked up, so be assured that I am not closing my eyes to all possible risks. And yet, since last October's expiration, I am up about 38% while SPY is up less than 1%. And since that was achieved with the benefit of only ONE expiration week per month, and not four or five, when I think about EVERY week being an expiration… well, you get the picture. But I still keep my eyes open for what can go wrong as much as for what can go right. Tally ho!

Best regards,

Pete

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.

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I look forward to having you on board, and to prospering with you.

Terry

The range-bound market continues to please those who employ an options strategy that involves collecting premium. The market remains in a neutral state while vacillating between the 1140 (resistance) to 1040 (support) area. Until this range is broken and holds, I expect to see more of the same. Currently the S&P is sitting in the middle of the range at 1091.60.

Technically speaking, the market has moved into a short-term neutral state so, with no real edge going into next week, the probability of a short-term directional move is anyone's guess.

As I stated last week, I will continue to watch the 1140 level of the S&P 500 as an area of potential overhead resistance. As for support, I am watching for a breach of the May 6 "Flash Crash" lows. The level was tested Friday (5/21), Tuesday (5/25) and again this past Tuesday (6/8), but the bulls were able to hold off all three bearish attempts. This could bode well for the bulls going forward if they are able to first push through the 1105 area of the S&P 500. If so, I think 1140 would be the next stop. I do expect that a push through the first level of resistance (1105) will come with a fight from the bears. A move to that level next week will certainly put the S&P into a short-term 'overbought' state and possibly a 'very oversold' state if the surge is sharp. However, I still want to be aware of the overwhelming bearish seasonal tendency that will be greeting us very soon - Triple Witching. I mentioned the following last week:

June is also a Triple Witching month. Four times a year stock options, index options and index futures all expire at the same time. The performance of the overall market immediately following June's Triple Witching has been absolutely horrible in years past. The week after has seen the Dow down 15 out of the last 17 years. Watch to see if the market is overbought going into the week following Triple Witching. If so, this could have the potential for a decent short-term fade to the downside.

The recent drop has yet to officially push the market down to the requisite 20% that defines a bear market. According to "Bespoke Investment Group" there have been 58 so-called corrections (defined as a decline of 10% or more) since 1927. In 33 of the occurrences, the correction never made it to 20% and the market pushed to higher highs. However, in the other 25 instances the move turned bearish.

How does this correction compare to the others. Well, going back, the other 32 instances (the current one being the 33rd), when the market has fallen as much as this one has the outcome for the bears has been overwhelming with 80% of the 32 instances (or 25) moving into a full blown bear market. The average decline was 35.5%. If that does occur, and the S&P moves below the 1040 support level I will be watching the 920-940 area for a bottom.

Economic News at a Glance:

Euro climbed to $1.21 after hitting a four-year low
Unemployment claims for the week ended June 5th dropped slightly to 456,000
Advanced retail sales plummeted 1.2% in May
Consumer confidence reading came in better-than-expected at 75.5 up from 73.6

Andy

Weekly Stock Options Trading Tips: June 14, 2010

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