Another surprising move today in face the face overbought conditions and the February highs of 1460. While our ETF Extremes continues to chug along taking advantage of extreme scenarios in the market our SPX Short Iron Condor strategy is in a bit of a pickle, (to put it mildly). The gap up today and strong advance early in the day never gave us time to get out of our position. Typically, during expiration week if the underlying, in this case SPX, moves within 5 points of a our short strike (call or put) we immediately exit the position.
Today was one of those rare occassions when we were unable to do so and as a result our underlying SPX penetrated our short call strike. This is not how we wish to handle the strategy from a capital preservation standpoint. Last month we were able to get out for a much smaller loss than other Iron Condor newsletter strategists, but it seems this month we could be on the other side unless Mr. Market pulls back and allows us the opportunity to get out with less than than the max loss/risk that we stated in the newsletter during the March expiration. This is just another reason why appropriate allocation in options strategies is so important. Most traders feel 5-10% is an appropriate amount to allocate towards any given strategy and I ahve to agree with that range. This prevents large losses from substantially affecting your trading account. Charles Kirk of the well-respected "The Kirk Report" frequently discusses this topic and occasionally offers related links. Check it out at www.kirkreport.com.
The one positive for our short call strike: there are quite a few technical indicators that have reached an extreme which typically signals that a short-term reprieve is in the near future. Today's gap is one such indicator and our overbought/oversold levels have reached a "very overbought" state. Furthermore, our shortest-term proprietary model has reached an extreme. When both reach this type of extreme we typically see a short-term decline over the next few days.
Overbought/Oversold levels for April 16, 2007
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SPY - 87.4 (very overbought)
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DIA - 82.9 (very overbought)
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IWM - 86.1 (very overbought)
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QQQQ - 75.1 (overbought)
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GLD - 86.6 (very overbought)
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OIH - 83.4 (very overbought)
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Have a great night!
Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com