Option Strategy Indices Explained

Feb. 20, 2013 3:59 AM ET
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Contributor Since 2008

I’m a swing trader of momentum stocks with a holding period of anywhere from a few hours to a few months. I run a number of screens to locate the strongest/weakest stocks out there, using technical analysis to determine my entries and exits. Trying to calculate the intrinsic value of stocks in my opinion is out of date and there is wisdom in crowds.I've developed a market timing system that determines when it's best to be long, short or on the sidelines, using a number of proprietary indicators based on many time frames. I believe that to have longevity in this field one must find ways to calm the mind and trade from a detached point of view. Emotionless trading will allow you to respond to what's going on right now in the markets, rather than reacting to daily fluctuations.View my personal blog http://zentrader.ca/

By Christopher Ebert

Reader Question:

I have seen reference to several option strategy indices on this site (LSSI. LCMPI, CCNPI). Can you direct me to where I can find more information on these indices (index structure, historical record, etc).


The three option indices were created right here on zentrader and each is updated here weekly.

They were originally designed as a tool to determine the best times to open certain types of trades, such as covered calls or naked puts (e.g. The Covered Call/Naked Put Index - CCNPI). But it quickly became evident that in addition to revealing the best time to open a covered call or naked put, the CCNPI was a very effective indicator of future market behavior.

Compilation of each index requires some complex calculations, but the concept of each is rather simple. For example, the CCNPI measures the performance of a covered call that was opened 112 days ago, with a strike price that was exactly at-the-money, and which expired this past week.

Say the S&P500 was trading at 1500 and a covered call was opened at a premium of $75 and a strike price of 1500. Assuming that the option was sold 112 days ago and expired this past week, it would have experienced its maximum possible profit of $75 because the S&P was trading at a level higher than the strike price. The $75 profit would represent a 5% gain over the original 1500 level of the S&P. In that scenario, the CCNPI for this past week would have been +5%.

Of course it is not possible to trade options on the S&P itself, and that is part of the reason for the complexity behind the calculations. But the process for compiling each index is as simple as the above example.

The historical record is currently limited to 2 years of past performance of each option index, and is published as a chart each week when each index is updated here on zentrader. However, a longer-term historical record would make for an interesting study, so I will look into compiling such a record sometime in the near future. Thanks for the idea!

If you are interested in an historical record of the option index updates, enter "options" or "CCNPI" etc. in the search box at the top of this page, then click the magnifying glass.

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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