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After the Party’s Over (by Fujisan)

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Fujisan here.

As the earnings season is winding down, we are going to see the change of the season of the equity market.  I found that it's much easier to spot the intermediate tops of the individual stocks than the major indices.  I am going to discuss the option strategies after the earnings season. 

Before I get into my weekly option topics, here are some updates on the general market:

SPX and EUR/USD Update:

Here is an updated comparison of the current and 1975 SPX charts.  Once again, our trader friend, ZigZag, kindly agreed to share his work.  Thank, ZZ!


Here is my updated SPY chart.


Here is my EUR/USD chart update.  My target has not changed since the formation of the bull flag back in July.  We are getting very close to the price projection.


As many of you know, I trade GOOG up, down, and sideways.  A couple of weeks ago, I discussed the option strategies to take advantage of the earnings, and now, after the party is over, GOOG is going through a consolidation phase.

The beauty of trading the options is that you can trade the sideway movements.  Yes, that's right.  You can make money on a sideway movement if you could define the price range and apply the proper strategy. Let's go through a couple of examples. 


As you can see, GOOG goes through a very narrow range of consolidation after the earnings – typically in the range of $40 up and down.  In addition, I don't see any divergences between the price movement and Oscillator, so GOOG is not ready to roll over just yet.


When you see a very narrow range of consolidation like this, you can apply "income" strategies like ATM (at the money) butterfly, ATM iron condor, double diagonal, double calendar, etc. and still have a chance to have a very high yield on your investment over the life of the options.

Income strategies typically employs delta neutral position (meaning you don't make money on the price movement) with positive theta (meaning you collect option premium on a daily basis instead of losing it),

Here is an example of ATM iron condor.  This position basically covers that $40 estimated movement of the underlying, which is between $535 and $575.  As long as GOOG is within this price range, you could double your money by the next OPX.


What if it breaks out of the range? – Even if it breaks out of this range, my risk is only $50~$80 over the estimated profit of $545.  Risk/reward is just too good not to take this trade.  All I have to do is to close out the legs that were broken, and keep the other legs which is still making money.  This is a Win-Win strategy!

If you have a particular bias as to which way the underlying is going to break out, you could simply put on one side of the legs instead of both sides.  This is called a "credit spread".

Here is an example of 570/580 credit spread.  This spread is to buy 580 Nov Call and sell 570 Nov Call.  The other side of the spread is 530/540 credit spread, and these two credit spreads make my ATM iron condor as illustrated above.



Here is another wonderful example of the range-bound stock.  As I illustrated last week, GS is forming the world infamous H&S pattern with a very defined support and resistance levels.  As long as the underlying is trading within this range, you can apply the same income strategies to take advantage of the sideway move.


Here is an example of 165/170/185/190 Iron Condor.  This is a combination of 165/170 bull put spread and 185/190 bear call spread.


The risk that I see here is that GS could come back and retest the recent high and form M pattern instead of H&S pattern.  As we are getting close to the major support line, you could put on the bull put spread first at the neckline, and then put on the bear call spread once GS gets to the shoulder level in order to complete the Iron Condor.  If this sounds too complicated, simply put this thing on altogether.

For those who like to take more of an intermediate term position, here is December 190/170 bear put spread.



Similar price action as GS with H&S pattern formation. 


Here is an example of Iron Condor.  I was able to put it in at a very good price and I'm already in a money.  Risk/reward is not as good as GS or GOOG example.  If you are planning to put it on, please wait for a good entry point.


If you don't want to deal with the other side of the credit spread, here is more of an intermediate term position of December 115/125 bear put spread.


Ok, this should be enough charts for the weekend. I hope everyone has a wonderful weekend!