This week, $SPX overcame the previous resistance at 3155 and appeared ready to take off. But then it faltered again, at roughly the 3185 level. Hence it is still in a trading that extends from 2920 to 3230. A decisive breakout of that range in one direction or the other will likely signal the next large directional move.
This article was originally published in The Option Strategist Newsletter Volume 16, No. 21 on November 8, 2007.
In the past couple of weeks, I’ve read articles and heard options traders talking about a strategy that is apparently becoming more widespread: the use of long-term options in a position as the preferred hedge when selling near-term premium. These types of strategies generally fall into the category of “diagonal spreads.” While this isn’t exactly revolutionary thinking, it is a new era in the popularity of diagonals. As with any strategy, there are nuances that may not always be obvious to those inexperienced with using it. So, we thought we’d go over some of the benefits and drawbacks of using these strategies.
The S&P 500 Index ($SPX) has been bouncing back and forth in a trading range for several weeks now. So, for now, $SPX is trading between 2965 and 3155. A wider trading range could probably be justified as well: 2920 on the downside and 3184 on the upside. 2920 was the top of the April-May trading range, and 3184 would close the gap on the island reversal. Either would be significant for a potential breakout, but until that occurs, we can expect continued volatile price action within the current range.
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So we have a sort of standoff developing. It would have a bullish resolution if $SPX could rally to 3184 and close the gap on the island reversal. However, a further break below that support at 2965 would be to the bears' advantage. So, in the short- term we are waiting for a breakout to occur.
The equity-only put-call ratios remain overbought. The standard ratio continues to trade at or near 16-year lows, as both ratios remain on buy signals in overbought territory.
This article was originally published in The Option Strategist Newsletter Volume 8, No. 16 on August 26, 1999.
Q: I would like to ask you about delta neutral trading which I have heard and read about. Could you give me a brief description, it's merits and drawbacks, and in what situations it is best used. K.T. 6/17/99
A week ago, stocks were on their heels after one of the worst down days on record on June 11th. Prices rallied within a couple of days, but the negativity of that day still hangs over this market. If $SPX were to fall below 2920, that would be bearish. But as it stands, the $SPX chart remains bullish as long as the Index holds above 2920.
Equity-only put-call ratios continue to fall, thus remaining on buy signals. That will continue to be the case until they visibly roll over and begin to rise.