Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

The Benefits of Credit Spreads…Gangnam Style Continued

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Fifteen minutes before the close Wednesdayit looked like the bulls were about to claim victory for the third straight day. But, to the bulls' dismay, the bears made a last minute appearance. The push lower took the S&P 500 (SPY) from $144.90 down to $144.00, which is where it sits after the close.

The move doesn’t seem like much, but the S&P was higher almost 1.0% Wednesday, before eventually closing the day down roughly 0.75%. If the bears are serious a move below $142.50 would have to occur before they are taken seriously.

Even after the move lower Wednesday, there are still several key ETFs that are in a short-term overbought state. I am watching FAS closely and EWY, the South Korean ETF.  A push lower in FAS would certainly be a sign that the market in general is headed lower which would be wonderful for my SPY bear call spread. However, I am a but more interested in EWY.

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The Biggest Leap In My Trading Career

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Trading often appeals to impulsive people, to gamblers, and to those who feel that the world owes them a living. If you trade for excitement, you are liable to take trades with bad odds and accept unnecessary risks. The markets are unforgiving, and emotional trading always results in losses.

– Alexander Elder (Trading for a Living)

I love Mr. Elder's quote. It embodies the typical retail options trader. Why do you think the most popular options strategy among retail options traders consists of buying out-of-the-money straight calls and puts?

There is a reason why out-of-the-money options are so cheap; it's because they are the equivalent of buying a lottery ticket. And gamblers love lottery tickets. Look no further than the hype around the latest Powerball jackpot.

But unlike the typical lottery system where the seller of the ticket pays only a small portion of the overall proceeds in the form of winnings, options are a zero-sum game in the truest sense of the definition – winner's profits are loser's losses. And the majority of loser's losses typically come in the form of speculative out-of-the-money plays.

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Doin’ It Gangnam Style

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A Few Random Thoughts

Before I get to the nitty-gritty I want to discuss a few random thoughts.

It’s been twelve days of range-bound trading for the S&P 500 (SPY). The benchmark ETF has been stuck between $140 and $142.50, but the journey through limbo land could be over soon enough.

The march into a short-term overbought today could be the last gasp for the bulls. The bears have been salivating waiting for the opportunity to push this market and the pot odds say its a go. The move since November 16th has finally extended itself so the odds are heavily weighted towards the bearish side.

If you had employed a few out-of-the-money bear call spreads over the past few weeks you should be in very good shape right now. A high-probability spread would have created a large margin for error just in case the bulls manage one push higher, but any advance over the next few days should be short-lived.

The Dow (DIA) and Russell 2000 (IWM) are officially in a short-term very overbought state with 9 other of the highly-liquid ETFs I follow. The S&P (SPY) has also joined the ranks of overbought which leaves only the tech-heavy Nasdaq 100 (QQQ) in a short-term neutral state.


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Some Investors Will Never Understand and That’s Okay

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I recently went back and forth with a gentleman who claimed that there are no statistical advantages in investing.

I asked him if he had ever used credit spreads or was familiar with the term probability of success. I wondered if he was familiar with the Black-Scholes model or binomial models in general. Did he have a sound grasp of mean-reversion or standard deviation.

No, he just wanted me to read a chapter from a book. As if in that one chapter, the author was able to defy mathematical science, more specifically probabilities.

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Use Probabilities Now!

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Some people will try
to take a simple concept and sprinkle it with some mumbo jumbo to make it seem
complicated and then claim only they can explain it to you! Don't listen or
don't buy into any such load of bunk!

Take options. Yes, a
lot of people, maybe even your stockbroker, will tell you options are too
complicated and confusing. What they may really be telling you is options are
something they don't want to spend the time to understand, so they don't want
you to trade them either!

It was only ten
years ago, that a privileged few investors who could take advantage of things
like streaming quotes and real-time options chains. Options were shrouded in
mystery and deemed too complex for the average Joe – to be traded only by the
so-called "sophisticated" professional investors.

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