A new series of Weekly options will be listed each Friday and expire the following Friday, except that no new Weeklys will be listed that would expire during the normal monthly expiration week.
These new options may open up new possibilities for our portfolios. When our current short options expire in two weeks, we will have to decide whether to roll over to new options with one week, 10 days (the June quarterlys), or the regular July options with 28 days of remaining life. We will keep a close eye on all the possibilities. Of course, theta will be highest in the one-week options, but they do not give us as much protection against a big market move because their absolute value will be less than options with a full month of remaining life.
This is a huge development. We will no longer have monthly expirations. Every Friday will be expiration day.
To get a rough idea of the significance of weekly options, consider this. If you owned a LEAP or other long-term SPY call at the 107 strike, with SPY closing at $106.82 Friday you could have sold a one-week 107 call for $2.01. Or you could have sold a July 107 call with 6 weeks of remaining life for $4.03. If you sold 6 one-week options for $2.01 instead of a single monthly call, you could collect $12.06 instead of $4.03 for the six-week period. Assuming that each Friday you might be buying back an expiring option for $.10 of premium value and paying $.03 in commissions each week, you would still be collecting $11.28 for the 6-week period, or over 2 ½ times as much as you would gain by selling the July monthly call.
For our portfolios, the significance might even be greater. With some options expiring each Friday, we should be able to become more neutral net delta every week without making expensive adjustments such as taking off a calendar spread that is at a distant strike from the stock price. As we know, when the market goes up, our portfolios become more negative net delta (and vice versa). If the market has gone up during the week, we will be able to buy back expiring (mostly in-the-money calls) and sell new Weekly calls at a higher strike price, a move that will generate more theta and make us longer net delta at the same time.
If the market falls, our portfolio will have become more positive net delta during the week, and on Friday, we would be buying back (or letting expire worthless) mostly out-of-the-money expiring calls, and selling lower-strike calls which will generate additional new theta and make our portfolios more neutral net delta, another double win.
I suspect that adjustments as we now know them will pretty much disappear and that we will be trading every Friday, choosing strikes that move us in the desired direction without our having to take off other spreads. We will need to tread softly at the beginning until we get a better handle on how the Weekly options will be trading. For example, yesterday there was a large bid-ask gap on those options, most likely brought about because volume was low (over 20 times as many options traded in the June series with two weeks of remaining life). Surely, the Weeklys were a market-makers dream (but I suspect it will end soon, and that lower spreads will prevail once investors become more familiar with them).
Here are some of my initial thoughts and observations on the new Weekly series:
In short, we face many new challenges. My first take is that the potential returns of our portfolios will dramatically improve with the new Weekly options, but it may take a few months to figure out the best way to integrate them into our strategy.
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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Terry
The holiday shortened week was defined by Friday's weaker-than-anticipated employment number combined with a newfound concern that Hungary may default on its debt. The news led to a sharp sell-off in the major indices and helped to push the S&P lower -2.3% for the week. Year-to-date the broad-based index is lower -4.5%.
The Labor Department released the highly anticipated report before the opening bell Friday and the number was well below the 500,000 forecasted by economists'. On paper, the 431,000 new jobs reported was the largest gain in over a decade. The unemployment rate fell to 9.7% from 9.9%. However, the number was inflated by temporary government hiring for the national census and unfortunately many of those positions will end in a month or so. So, when taking out the temporary government hiring only 41,000 jobs were added in May by the private sector; certainly not an encouraging number.
"On the surface, they look great," Joel Naroff, president of Naroff Economic Advisors, said of the numbers. "But that beauty was only skin-deep. The private sector is not out there hiring like crazy."
The disappointment among those on Wall Street was evident as the Dow plummeted 323 points, its third worst performing day of the year. The index closed below the closely watched 10,000 level for the second time in two weeks. All in all, the numbers indicated that the economic recovery may not occurring fast enough for the millions of Americans that remain unemployed.
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.
I will continue to watch the 1140 level of the S&P 500 as an area of potential overhead resistance. Although, I think I might broaden that a bit to a range of 1140-1170 as a top. As for support, I am watching for a breach of the May 6 "Flash Crash" lows. The level was tested Friday (5/21) and again Tuesday (5/25), but the bulls were able to hold off both bearish attempts. In summary, the new range that I am following on the S&P 500 is 1140-1170 to 1040. Currently the S&P sits close to the bottom of the range at 1064.88.
On a seasonal basis, Historically, June is the one of the weakest months for the S&P with only an average return of 0.3%. June marks the entry into the "summer doldrums" which consists of the weakest rally among all four seasons.
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.
Seasonality alone is (in almost every case) not a reason place a trade. However, when compared with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously. Always be aware of the market's seasonal picture.
Next week the key releases will be the Fed's Beige Book on Wednesday as well as Retail Sales and Michigan Sentiment on Friday.
As I stated last week, a range-bound market is typical during the summer months and as the market officially moves into summer next week I expect that we shall see history repeat itself. However, if I had to choose a side I would say that the bears could gain intermediate-term control and push the market lower over the next few months. Again, a sustained move below the "flash crash" level (1040 on the S&P) could spell trouble for the bulls.
Andy
Overbought/Oversold as of June 5, 2010
Major Benchmarks