By Chris Ebert
For more than a year now, I have posted periodic updates on the performance of several option trading strategies here at zentrader. These updates were intended to give traders an edge in the market, not only by showing which option strategies are currently profitable and which should be avoided, but how the options themselves can help predict future trends in the stock market.
Stocks and Options at a Glance
Beginning next week, I will begin publishing a brand new, re-designed series of option updates. The most exciting change in the new updates will be a new chart entitled "Stocks and Options at a Glance". As the name implies, this new chart will allow readers to view the current state of the stock market as well as the performance of nearly every common option strategy, in a single glance.
In-depth analysis will continue as usual, so readers will continue to enjoy all of the coverage on performance and trends of all the different option strategies, and the implications those trends have for the stock market. The new chart will simply provide a quick and easy alternative(click to enlarge)Click to enlargeClick on chart to enlarge
3 Simple Categories Cover Most Common Option Strategies
A new, simplified analysis will break down all option strategies into
just 3 categories (A, B or C), based on the current trend in the S&P 500 index. When A+ trades are profitable, A- trades experience losses, and vice versa. The same is true for categories B and C. The chart will show which trades are profitable each week. For example, A+ B- C- on the chart means Covered Calls, Naked Calls and Short Straddles are currently profitable.
- (+) Covered Calls
- (+) Naked Puts
- (-) Long Puts
- (-) Married Calls
- (+) Long Calls
- (+) Married Puts
- (-) Naked Calls
- (-) Covered Puts
- (+) Long Straddles
- (+) Long Strangles
- (-) Short Straddles
- (-) Short Strangles
Suitable for Use with Elliott Wave Analysis
The new chart is also intended to be useful for traders who use Elliott Wave analysis. While not entirely the same as Elliott Waves, the options analysis uses a "textbook" wave consisting of stages 0 through 9 for a bear market and stages 0 through 5 for a bull market.
Since stages 0 through 4 are identical in either a bear or bull market, stage 5 becomes an important decision point. In a bear market, stage 5 usually confirms the bearish trend but also has the ability to mark the end of what was merely a correction in a broader up-trend. In a bull market, stage 5 usually entails a resumption of the uptrend but occasionally marks the beginning of a bear market.
A bull market will continue to repeat stages 0 through 5 indefinitely, until at some point stage 5 fails to materialize, at which time the market will be in stage 5 of a bear market. On the other hand, a bear market almost never continues past stage 9. Once implied volatility has increased to such a high level that Covered Call trading can profit, even during the worst of downturns, a bear market is almost always on its way out.
Just a note to readers: Performance of all option strategies shown is based on at-the-money trades opened 4 months (112 days) prior to expiration and closed on expiration day, using an ETF that closely tracks the S&P 500 index, such as SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Savvy option traders may obtain better results with out-of-the-money or in-the-money options or with different expiration dates. ATM options with 112 days to expiration are only a benchmark. Many individual stocks tend to experience similar options performance to this benchmark, except when individual events cause such stocks to loose correlation with the S&P.
Share Your Thoughts
Comments and constructive criticism are always welcome. Enter them in the comment box below, or send them to OptionScientist@zentrader.ca
The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book "Show Me Your Options!"
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