This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994.
We have written a few articles about collars this year, but another one is appropriate because it is a strategy that can give one peace of mind in a market like this.
To review, a collar consists of long stock, a long out-ofthe- money put, and a short out-of-the-money call. The resulting position has limited risk, because of the ownership of the put. It also has limited profit potential, because of the presence of the short call. In general, investors don’t like to pay a lot of cash out of pocket for the put/call combo that sits on top of the stock. In fact, a “no-cost collar” is one in which the price of the call is equal to or greater than the price of the put when the position is established.
Did you know McMillan Volatility Bands can be used on intra-day charts? McMillan Volatility Bands, a charting analysis tool developed by world-renowned options trader and author Lawrence G. McMillan, is an optimized approach to John Bollinger's Bollinger Bands. Leveraging his expertise in options trading, Lawrence designed his volatility-based version with a focus on how option prices are calculated – using the Black-Scholes definition of volatility. The McMillan Volatility Bands' pricing model assumes a financial asset's volatility should be measured in percentage change rather than absolute value change.
The selling that began with a modest overbought condition on October 12th has snowballed into a major decline, capable of testing whether or not a bull market still exists. Now the only remaining near-term support area is at 3200. If that gives way, a pattern of lower highs and lower lows will be in place, and that is the mark of a bear market. That would be a game- changer.
The pullback in stocks over this past week closed the third and final gap of the Oct 10th-12th buying spree, and $SPX came all the way back down to the breakout level of 3425-3430. It has bounced off of there for now, and so this might merely be a sort of classic pullback to test support and then move higher. As long as $SPX remains above 3400, its chart has a bullish slant to it.
One of our favorite seasonal trades – and one of the most rewarding – is the October Seasonal Trade. It will be coming up at the end of October. It calls for buying “the market” on October 27th and selling out your position on November 2nd . BUT...the trade is only taken if there has been a 3.2% or larger decline sometime during the month of October. So far, we don’t have that last criterion satisfied, but it’s still early in October.
There has only been one contested election since listed options have been trading – the 2000 election between George W. Bush (43) and Al Gore. Election day was November 7th, 2000. The accompanying charts, courtesy of tradingview.com, show the pertinent time period. The three months August, September, and October “+” – as shown in the table at the beginning of this article – are noted in blue on the $SPX chart of 2000. There had been a good rally in August, but that had been completely reversed by mid-October. Then a late October rally brought $SPX back almost exactly to where it had been on July 31st – meaning that the three-month period was essentially a “wash.”
The upside breakout over 3430 that began last week extended into a buying spree this week. A modest correction then ensued. This pullback seems normal, so far, and the bullish case is still intact as long as $SPX remains above 3400.
The equity-only put-call ratios are grudgingly bullish, as these ratios have turned down again even though they are still at very low levels on their charts. It feels like more of a "sell cancel" than a "buy."