View: Option Greeks More Important Than Greece | zentrader.ca

Option Greeks More Important Than Greece | zentrader.ca

Content added from zentrader.ca/blog/?p=12667

By Chris Ebert

The most notable change in the option indices this week was a return of the Covered Call/Naked Put Index (CCNPI) to “Bullish”. The CCNPI measures bullish or bearish sentiment in the market. While a return to bullish territory is generally a good sign for traders looking for buying opportunities, this week’s change was nothing to write home about.

This week’s performance of the Index is more reminiscent of a pattern that was seen in October 2011. At that time, stocks did perform well for several weeks, but the gains were mostly erased by December. The CCNPI did not give a clear “Buy” signal until December, which coincided with the beginning of the 2012 Bull Market.

The CCNPI is the most sensitive of the three option indices. This week’s return to “Bullish” is an important indicator or the emotions of traders. The positive performance is a sign that traders want to put the European Crisis behind them. Given that such performance came in a week in which poor US employment numbers were released also shows that the market “wants” to be bullish.

Despite the market’s desire to become bullish again, the Long Call/Married Put Index (LCMPI) does not show any support. The LCMPI measures bullish strength, and such strength is currently non-existent.

Perhaps surprisingly, the Long Straddle/Strangle Index (LSSI) remained “Normal” this week. The LSSI measures the justification of fear in the market. Even with all of the unknowns surrounding Greece, the market is still functioning within normal limits.

Given that the LSSI shows the market is “tradable”, the CCNPI indicating “bullish” emotions and the LCMPI not giving any indication of bullish strength, this week’s featured option trade remains unchanged from last week: a 1:2 Ratio Bull Call Spread.

If the market rallies after the Greek elections, the spread can provide unlimited profits, and if the result is a selloff, the spread would probably expire worthless.

Questions about these or any other option trades are encouraged. Please enter them in the comment section below, or email them to optionscientist@zentrader.ca.

All Index values are calculated relative to the S&P 500 using volatility data to extrapolate the theoretical performance over the given time periods. It is not possible to match the exact performances shown because the strike prices and expiration dates available in actual trading will always differ from those used in the calculations. Here is a chart showing key posts annotated on a Dow Jones Chart to show how you can utilize this information in your trading.

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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