A twitter follower recently inquired about extremely heavy option volume in a particular stock. I explained that it was due to dividend arbitrage. For those wondering, the following Q&A from a 2004 issue of The Option Strategist explains the intricacies of this professional-favored strategy.
We have often used the phrase, “oversold does not mean buy.” It is probably one of the most useful phrases a trader can employ. Many a would-be bear missed almost the entire bear market of 2008 because it got immediately oversold in September 2008 and stayed that way all through one of the worst bear markets ever, that unfolded over the next couple of months.
The $SPX chart remains bearish after having broken down through 1950. $SPX sliced right through the next support level at 1925, and after temporarily holding at 1915, appears ready to test the major support level at 1900.
Equity-only put-call ratios remain on sell signals (see Figures 2 & 3). They are both rising steadily, and as long as they are trending higher, that is negative for stocks.
One of our customers recently asked a good option-related question regarding the purchasing of worthless options at expiration. This is a very common occurance so I figured my response is worth sharing with everyone. See the question and answer below.
Dear Mr. McMillan,
We all know that trading options is exciting, highly competitive, and can be very profitable. The key to long term and consistent profits in option trading is options education. The McMillan Mentoring Program, which is run by former Market Maker, white badge AMEX Floor Official, professional trader, and longtime MENSA member Stan Freifeld, can take your trading to the next level.
I want to spend just a moment pointing out how these market tops can unfold. One good example was in 2007. The market had just made new all-time highs in July and everything seemed wonderful. Volatility had been low (except for one hiccup back in February, 2007), but no one seemed worried. Then, $SPX broke down sharply with a 30-point down day (yesterday was a 40-point down day for $SPX), and that unleashed the bears.
The genie is now out of the bottle, and it's going to be very hard to put him back in again. $SPX has broken major support at 1950, and that changes things: the chart of $SPX is no longer bullish; it is now bearish.
Equity-only put-call charts continue to remain on sell signals. These put-call ratios will remain bearish until they roll over and begin to trend downwards. It doesn't appear that will happen anytime soon.
Wednesday was a volatile day, with prices swinging back and forth several times during the day. However, by the time that the dust settled, $SPX was virtually unchanged. This is typical of the way that the market has been behaving recently. In fact, if one takes a “neutral” look at the $SPX chart, it is possible to see a trading range, between roughly 1950 and 1980, over the past month.
We are going to have a slight schedule alteration for August. Since there are five Thursdays in July, and since our office is going to be closed at the end of August for three days, we are going to publish this newsletter on the first and third Thursdays in August. This allows us to keep the two-week spacing between issues without skipping an issue. Regular publication dates will resume in September. The weekly Hotline updates will continue to be issued as usual.
We follow four main indicators, and they usually guide us in the correct direction of the markets. As noted elsewhere in this issue, price is the most important indicator of all (in this case, the price of the Standard & Poors 500 Index [$SPX]). However, the others – equity-only put-call ratios, market breadth, and volatility indices – are important, too. Usually, we want confirmation from price before acting on opposing signals from the other areas.