Several key economic indicators, namely the core CPI, were reported before the bell and the S&P futures responded favorably. The S&P sat in an overbought position and the move higher pushed it further in that direction. When the market sits in an overbought position like it was immediately following the opening bell, the probability of an opening gap closing increases. The large gap opening did close approximately an hour only to once again back by the end of the trading session.

Typically, the market will trade in a tighter range as it moves closer to options expiration. I really do not think we will see anything different this time around. Keep a close eye on the 1360 level of the S&P and the 1700 level on the S&P. These are key support levels that if broken could lead to a short to intermediate term correction going forward. So far each attempt over the last two days to push the market below these levels has been unsuccessful. If the market is able to hold above these levels going into post options expiration then we should see the typical short-term post-expiration bearishness. This usually only lasts for a day or two but it happens to be a fairly accurate seasonal measure, especially if the market is in an overbought state.

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Now onto today’s Gap Fade trade. A trade was signaled in our Gap Fade strategy today. SPY opened at $137.04, up $.34 from Tuesday’s high of $136.70. As a result the following trade was signaled:  

• Buy to Open the SPY Dec06 138 puts (SFBXH) for $2.55 just after the open. Slightly after 10:30 EST the gap closed so we decided (per the guidelines) it would be best to take off our position at that point.  We closed out the position selling the Dec06 138 puts (SFBXH) for $2.80, or a 9.8% gain on the trade.

The gain today brings the strategy’s YTD return to 3.6%. We are positive for the expiration month; however, we are still far below our 35% highs for the year. Our win ratio YTD is 76.0% in the Gap Fade strategy, 25 trades total, 19 wins, 6 losses.    As we state on our website, the ETF Extremes, which is up 35.7% YTD, with no losing trades YTD, is a wonderful hedging strategy for the Gap Fade. When combining both sample portfolios YTD the strategies are up a respectable 19.7% YTD. Please do not hesitate to email us with any questions or comments.

Andrew Crowder, Chief Investment Strategist, Crowder Investment Research, LLC