The S&P 500 finally took a reprieve today after seven straight days of gains. SPY traded as low as $155.22, but finished the day back up towards the $155.70 level…indeed frustrating for those of us with bear call spreads.

But again, it's all about staying the course. And given the current overbought state of most of the highly-liquid ETFs I follow, the pot odds favor the bears. Bear call spreads are the appropriate options strategy in this case, although the low implied volatility makes it rather difficult to sell out-of-the-money credit spreads for decent premium. Just a reminder, all things being equal, the better the premium the larger the margin for error.

For all you newbies an 80-85% chance of success on a credit spread has a larger margin when implied volatility is higher. Given that the VIX is near all-time lows, you can quickly see how the margin of error is less than normal even though the probability of success is the exact same.

OVer the next few days I will be looking at several ETFs that are currently in a very overbought state for possible trades in both of my options strategies. Subscribers stay tuned!

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If you are a believer in a statistical approach towards investing please do not hesitate to try one of my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it's free for 30 days.

Disclosure: I am short [[SPY]], [[DIA]]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

While I have my doubts about the sustainability of the current rally I'm not going to give you the reasons why…because it's only my opinion and as we all know when using a statistical approach towards investing/trading opinions are essentially useless.

The Russell 2000 (IWM), S&P 500 (SPY) and Dow (DIA) have recently pushed to all-time highs which has pushed our High-Probability, Mean Reversion indicators to extreme overbought states.

Moreover, if you look at the RSI over various time frames you will quickly notice that most of the ETFs I follow are pegged right now. Typically, when this time of reading occur we see a decent decline short-term decline going forward.

But there's something different this time around. First of all we have the VIX near historical lows. Will we see single digits in the investor's fear gauge? Secondly, the longer-term picture, at least from a mean-reversion perspective looks ominous for the bulls.

Just look at the RSI (14) on a five year chart for the S&P 500.

As you can see the indicator has pushed into an overbought state for only the second time in the last five years…and the last time was in early 2011 when SPY fell from $130 to $110.

It's been a rough few months for those of us who sell credit spreads for a living. But, when you make 80-85% trades every expiration cycle you should expect to see a few losers in the mix. I currently have a few credit spreads that are not going my way, but given the short-term extremes I am still confident in positions with the exception of a fairly aggressive (68% chance of success) trade I made in the Theta Driver strategy.

Of course, only time will tell, but by the looks of it the bulls should be running out of steam very soon. Typically expiration week sides with the bulls. We have seen this over the past year with 9 out of 12 expiration weeks reaping higher returns, but we haven't seen the market in such a precarious overbought state.

Situations like what we are seeing in the market are what I thrive on as a statistically-based trader. I use only highly-liquid ETFs to take advantage of short to intermediate-term extremes in the market and pounce on those opportunities using statistically-based, high-probability trades. My strategy of choice of course is credit spreads, Verticals, condors, etc. you name it, I sell it. I always want to take the other side of a highly-speculative trade and in this environment speculation has become robust. Now its time to take advantage of those options buyers who are taking 15% chances on a trade. Let me have the other side and the 85% chance of success to go along with it. I will win out every time over the long run. It's just a matter of staying the course and keeping position-sizes within a reasonable level. The latter is by far the most important factor in the longevity of a trader.

Disclosure: I am short [[SPY]], [[DIA]]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Again, I only have a few spots left and will be opening up the strategies to the public to fill the remaining spots tomorrow.

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The Statistical Truth

I hate to say this about some of my fellow options traders, but I can't tell you how much I abhor those in the industry (you know who you are) that absolutely ruin the true benefits of options for the self-directed investor. Claims of outlandish 300%, 400%, 1200% in just a few days. Encouraging the use of low-probability out-of-the-money puts as a predominant strategy without the mention of selling premium.

It's frustrating. It's frustrating to see so many so-called gurus with no real-world experience act as options traders when their services fail time and time again. Again frustrating.

For some reason investors don't crave what's truly important, realistic strategies with realistic gains. Transparency. Knowing that trading isn't easy and is a life-long endeavor and that while the journey may be bumpy at times over the long haul it is worth all of the effort. A long-term approach to short-intermediate-term trading with high-probability trades as its foundation. Selling credit at every extreme. Always talking about the importance of position-sizing. Always considering risk-management.

Why would people rather join services that tout such outlandish claims? It is beyond me. Are self-directed investors really that gullible? Why do they continue to fight statistics?

It is my hope that I have carved and will continue to carve a slice of decency and transparency into the options world. I am certainly not perfect, but I know that selling options is a valuable strategy with an overwhelming statistical advantage. And it is my goal to teach as many self-directed investors as I can about the benefits they offer.

And with IWM still in a short-term overbought state I remain focused on selling out-of-the-money credit spreads, more specifically bear call spreads with a high-probability of success. If we see a swift move lower over the coming days I would not hesitate to take the other side and sell a few bull put spreads, but we will have to wait and see what happens over the next 3-5 trading days. If we are able to place a bull put spread we would have the makings of an iron condor with a nice wide range. This is how I prefer to trade iron condors…patiently wait for the market to allow me to leg in to a condor rather than trade both sides simultaneously. By legging in I am able to create a larger range, thereby increasing my probability of success. Again, I want to initiate trades with a probability of over 80%. That would equate to a delta of roughly .20 plus or minus .05.

Remember, it's all about the probabilities. Initiating trades on highly-liquid ETFs with a high-probability of success is the key to long-term success. Of course, the strategy needs to be coupled with a sound risk-management approach and that can be taken care of at order entry through proper position-size. Basically, stay reasonably small and you will avoid any catastrophic events that could really put a dent in your account.

Disclosure: I am short [[IWM]], [[SPY]]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

But, something today made me particularly happy.

More food for thought.

Kindest,

Andy

Disclosure: I am short [[QQQ]], [[SPY]].

As I suspected – irresponsibly. And I told him so.

His response – I was an idealist.

An idealist? Why? Because I do not allow marketing efforts control my options strategies? Because I do not gamble with options by attempting to guess which way an earnings call will go? Because I do not buy out-of-the-money options in hopes that an option will move towards my chosen strike price? I could go on and on.

I was amazed how little he knew about how to effectively trade options. He actually asked me about how I used statistics and gain an advantage in my trading. This man has been in the industry as an editor for several major newsletter publications for nearly 15 years. 15 YEARS!

And yet, he doesn’t know how to create a trade with a probability of success of your choice – be it 70%, 80% or 90% chance of success.

He stated that using credit spreads does not work for the retail public. It doesn’t sell. It’s too complicated.

I could not believe what I was hearing. This pompous man, who had no clue about the true advantages of credit spreads (like in our Theta Driver Options Strategy) basically felt as though the public was too stupid to place a credit spread.

He told me that his marketing department told him not to use credit spreads in their options services as the quick, gambling mentality was a bigger seller.

That might be so – at least for now.

But that is my goal with this service. My goal over the past six years. I do not market, I do not tout outlandish gains. I only try to bring to you the best strategies that I know. The strategies that floor traders use. The strategies that create real statistical advantages. And then I try to incorporate risk-management techniques as well. He actually scoffed at that as well.

If you want an options strategy with a gambling mentality then my service is not for you. I am not a gambler and therefore I do not offer daily trades with no statistical advantages.

Patience is the key ingredient to the success of my strategies and forcing a trade is, in most cases, detrimental to any strategy. My strategies requires patience coupled with a disciplined approach. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes my options strategies successful.

I am a realist. I realize there is no holy grail in trading. However, one thing I do know for certain is that I have found several unique, and concrete strategies that make the world of sense to me and I trade them to make serious money over the long-term. Furthermore, I realize that the less I trade, the better my strategies will perform over the long run: And the long run is what matters. This is what makes my strategies unique and so far, successful.

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