8/19/2007 7:55:48 PM
What a ride!
While the markets have been through one of the wildest months in many years, dropping from around 1555 a month ago to a low intra day on Thursday of 1370 (almost 12% in just one month), we achieved a gain of 5.5% before commissions (5.22% after commissions). Billions upon billions of dollars were wiped off markets this month but with our sold Call Spread, we were able to sit back and watch the turmoil unfold with indifference.
With Friday's strong move our system moved back into Buy mode. It looks like the move down last week was a final wash out of sellers and caused a whipsaw action in our system. This is not a problem, we now have both sides covered, with a 270-point buffer (i.e. 1580 less 1310) or looked at another way, the market can move up or down roughly 10% from here and we'd be safe.
On August 9th we sold an SPX Sep 1310(SXYUB)/1300(SXYUT) Put Option Spread for a net credit of $0.80. (i.e. $80 per $1,000 of margin)
On August 17th we sold an SPX Sep 1580(SXMIP)/1580(SXMIR) Call Option Spread for a net credit of $0.40. (i.e. $40 per $1,000 of margin)
Well, so much for our bullish divergences last week, the market smashed through supports and then smashed right back through resistances to finish at around the same point as last week. We are witnessing a violent market, which is what happens when fear gets a major grip on the psyche of the participants. In addition, it was options expiry last week, and this is renowned for volatile movements.
For the near term, we're back in buy mode and we still have a bullish divergence on the MACD, as was the case in March (see chart above), however we also had a positive divergence on the RSI in March, which we don't quite have now. If we don't get a close above 1460, then we could retest the lows of last week, but a close above 1460 should take us quite easily to the next level of resistance at 1490-1500 and that's the more likely scenario.
Summary of Position Last Month
We entered an Aug 1615/1625 Call Option Spread on July 23 and received a premium of $55 per spread. Then on August 6 & 7 we closed this position by buying back the sold 1615 call and then selling the bought 1625 call. We managed to close the position for effectively zero cost (i.e. commission only). This equated to a net return of $52.20 per $1,000 of margin or 5.22% after commissions for one month (using Interactive Brokers commission rates). You'll note that we closed this position before expiry in order to free up margin and thereby enabling us to be free to enter our next position for September. The CBOE settlement price for the SPX options for August was 1450.11.
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