Good Day Fellow Traders!
Another successful trading week, we got into the game a little late this week, but with a switch of indexes used we were still able to hold the 4% line. Normally I use the RUT or SPX indexes, but last week we went to the NDX.
This index tracks the NASDAQ Top 100 stocks. This index is a little more difficult to track than the others, so I don’t use it much. Here are the main differences: The NASDAQ ticker shown in CNBC, FOX, Bloomberg and other cable networks is the full NASDAQ index; The NDX usually trades in increments of $25 (giving spread values of $2,500) rather than the $10 (giving spread values of $1,000); The premium given is usually lower on a percentage basis than the other indexes.
There is one big similarity between NDX and RUT. Both are Friday morning settled. Meaning that the settlement price is determined at 10:00 AM Eastern Time on Friday morning. This can be nice if you are well away from the spread boundaries, but a little nerve wracking if you are close to your spread boundaries as you can’t trade the last ½ hour of activity on the spread.
This week was a very unusual week. The RUT and SPX were giving VERY little in premium. VIX activity increased early in the week then dropped Wednesday – Friday. Generally when VIX drops, so does premium. It was also the end of the quarter, so the beginning of the week, many were selling on the recent run up to lock in quarterly profits. Later part of the week, prices dropped as volume dropped and buyers just kinda went away.
This was shown in the indicators I watch all week last week. Finally on Thursday I got confirmations and put on a trade.
Now let’s go analyze this week’s trade.
TRADE FOR WEEK ENDING March 30, 2012:
NDX
NDX 2775 Call $1.57
NDX 2800 Call ($.26) This gave a $1.31 Net Credit for a 5.24% ROI
ANALYSIS
1. The NDX 20 Day SMA crossed the 50 Day SMA and both are heading lower. This was the first indicator that the Call Credit Spread is the way to go today. Also the price line is below the 20 Day SMA and way below the 50 day SMA. The price just kept dropping as did the 20 and 50 Day SMA.
2. The 2775 price level was 1.5 Std Dev away from the underlying price at the time of the trade. The 2800 was almost 2.0 Std Dev away at tome of trade. As the price decline kept up through the rest of Thursday and Friday morning, this degree of safety just got better.
3. My probability calculator put the odds at 90.01% of NDX ending up below the 2775 Call. I have not had a losing trade this year when the probability calculators showed the odds more than 85% in my favor.
4. When we were doing put spreads we looked at higher highs and higher lows indicating that the price for our index was on the way up. Great for our contrarian philosophy. This week we are seeing lower highs and lower lows. A marker that the price is heading lower. Using our contrarian idea we go with the call spread to make our money. There is a reason all this technical analysis stuff is out there. It can help you dramatically increase the odds in your favor. This definite pattern played out again the way it usually does. That means we did interpreted well and piled the odds MORE in our favor.
Some Things to Look for:
1. This is the start of a new quarter. Since there was a sell off at the end of the week, look for those sellers to come back in as buyers this week.
2. The big money managers will be rebalancing over the next week or so. This usually means lots of activity and lots of volatility. More volatility means more premium, but also more risk in the market.
3. There has been a long term build up in the markets – basically since the start of the year. We are ripe for a pullback, but it should be short lived – like a breather. Then we should start another run up that could last until late summer/early fall when the political season gets into high gear.
Thanks to Freestockcharts.com for the chart site I use. All of the charts you see in this blog are from freestockcharts.com. They have great charts and some nifty tools to help your analysis. I use the site tons. It is a great resource. And no, I don’t get any compensation for saying this.
DISCLAIMER: Hashley Capital Management, LLC; as well as I are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in options is risky and can result in loss of capital. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC and are the opinion of Hashley Capital Management only. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence, that is your decision and yours alone.
Reach me @:
Email: hashleycm@yahoo.com
Twitter: @awagel01
Or leave a comment on the blog
TTFN
Ash
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