The short-term bounce that I first spoke about late last week seems to have
exhausted itself. The short-term bounce could continue, but the high risk/reward
position of the trade seems to have faded as prices have risen.
The market still seems a bit heavy to me here. I know the market has
performed exactly as it should have after the new-high correction, but there are
a few underlying indicators that are starting to make their way to the
forefront, at least over the short-term.
The Nasdaq 100 (QQQQ), which is often viewed as a leading indicator, is once
again nearing a short-term overbought situation. Moreover, the upside gap in the
tech-heavy QQQQ also went unclosed. Couple the two aforementioned situations and
I think you can see where I am going: the probability of a short-term reprieve
has increased. With the market currently in a neutral state I would like to see
a further push into overbought territory to allow for a better risk/reward
setup, so I will be patiently waiting on the sidelines until that type of
favorable setup presents itself.
I continue to be amazed with the 260 point range position in the S&P
(SPX) that we were able to establish in our Iron Condor strategy. As long as the
VIX chops around the 15% - 20% range I expect to see simialr wide-range (high
probability) positions in the future.
The 260 point range allows for the underyling S&P (SPX) to move of
roughly 8.5% to the upside or downside before our position is in jeopardy of a
loss.
The second expiration cycle for the SPY Diagonal LEAPS
strategy is underway and the strategy has already pushed higher $246.50 in our
test account. The strategy is in its fifth week of existence and has gained
approximately $960 or 4.8%.
Our November short strikes in the SPY (mentioned in Friday’s (10/19) post)
sit at 150,151, and 152. The three short call positions expire in 24 days. Our
long LEAPS strikes continue to be 125 and 130. Both expire in December 2009 or
787 days.
The delta is hovering around 170 with a gamma of -16 and a theta of 22. For
the most part we want to remain long in the strategy, which is why we go into
the beginning of each expiration cycle long one LEAP contract. What does this
mean? We carry 5 long LEAPS contracts and sell four against them. This allows
for some upside protection and gives us the ability to make adjustments easier
when the indice inevitably moves lower. Hopefully we will see the market
vacillate widely over the next four weeks so that we can see how the strategy
reacts under adverse conditions.
Overbought/Oversold for October 23, 2007
S&P (SPY) - 40.8 (neutral)
Russell 2000
(IWM) - 47.1 (neutral)
Dow (DIA) - 34.9
(neutral)
Nasdaq 100 (QQQQ) - 66.2 (neutral)
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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com