Over the last few weeks the S&P seems to have found a comfortable trading range. I expect to see much of the same as the market moves into the week of options expiration.
We learned some valuable lessons last expiration period in our SPX Short Iron Condor strategy and will certainly not make the same mistake twice. Last month was indeed a anomaly, but this is where we learn the most. As it currently stands our Iron Condor strategy is 45 points away from the short call strike which should be ample room in assisting the strategy towards a max gain of 6.5% this month.
The underlying SPX had 135 point range to work with during the four week expiration cycle or a 4.5% move in either direction. We should receive the same opportunity to make 6.5% during next month's four week expiration period. The summer doldrums typically provide the best opportunity for an Iron Condor strategy with a wide range as the vacillation tends to decrease.
Just look at the historical average return of the S&P on a monthly basis over the last 60 years.
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Jan. - 1.4%
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Feb. - (-0.2%)
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Mar. - 1.0%
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Apr. - 1.3%
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May - .0.3%
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Jun. - 0.2%
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Jul. - 0.9%
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Aug. - 0.0%
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Sep. - (-0.6%)
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Oct. - 0.9%
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Nov. - 1.8%
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Dec. - 1.7%
As you can see the "sell in May and go away" period is rather flat. As I stated yesterday and in my most recent newsletter issue, the Stock Trader’s Almanac states “A $10,000 investment compounded to $5444,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.
So, the question is, how can we make money during the historically flat period from May-October. Well, look no further than an Iron Condor Strategy. An iron condor performs best during a range-bound environment. This might sound like an attempt at shamelessly promoting our SPX Short Iron Condor strategy and in a way, I admit, it is. It never hurts to learn an alternative investment strategy to see if it meets your risk profile and more importantly, if it can help you achieve a higher potential return in your overall portfolio. The strategy is not a "get rich quick" strategy and it has some obvious risks like any other leveraged investment strategy.
However, risks can be reduced in many ways, position sizing, defined stop-loss, etc. But, another way is to limit short iron condor positions to particular expiration periods. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. We keep an updated chart of the SPX's monthly % gains/losses on our insider's page to help our subscribers with this type of dilemma. You may find other underlying equities that better suit your investment profile, but at least, check out the Iron Condor strategy, whether through our White paper or another website, it never hurts to learn more about alternative ways to invest/trade.
Overbought/Oversold levels for May 11, 2007
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SPY - 60.5 (neutral)
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DIA - 70.0 (overbought)
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IWM - 52.3 (neutral)
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QQQQ - 61.5 (neutral)
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GLD - 35.9 (neutral)
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OIH - 66.8 (neutral)
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Have a great night!
Andrew Crowder, Chief Investment Strategist,
www.crowderinvestments.