Tuesday, September 19, 2006
What's Next for the Market?
This scenario has now played out. The model is switching to short at the close today. The S&P 500 index has now had 3 weeks of sell signals on my old model. Now maybe it is finally time for this much delayed longer term scenario to play out. Near today's highs I bought 20 put contracts in my Roth IRA account. So now I am effectively short 5000 QQQQ shares worth just over $200k. The short-term trend is going to be down from here. The stochastic will have to fall tomorrow unless there is a significant rise in prices. The McClellan Oscillator looks set up for a fall too. This isn't all the evidence to show that the "stars are aligned". So maybe now I will be surprised? :)
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2 comments:
Interesting blog. I think that I could actually learn something from you. Though I am cleared to trade options, I've never actually bought (or sold) any contracts.
Looking at the data you've put together, I could agree that QQQQ will likely open on the downside tomorrow. But, I am not so certain that it will close the day that way.
I hope that you don't mind if I ask a few questions. How many months out do you usually look for your contracts? How low do you think the underlying QQQQ can go? And, you said you bought 20 put contracts, but you stated you were short 5000 QQQQ shares. Was that a typo, or did you already have 30 contracts?
Good luck.
Hi pfstock - thanks for your comments and questions. I was already short 3000 shares (shorted too early despite the model...) in my taxable trading account. I use options in the Roth IRA as actual shorting and margin are not allowed. Usually I buy in the money options where there is little time premium and the price is equivalent to what the price of the same futures contract would be. This time I bought $43 October puts. The model typically gives trades that last one to two weeks so there is no point going further out in time - you just end up paying a time premium or having to go deeper in the money to eliminate it. On the other hand if you thought your trade will last longer than the expiration date it is worth doing it to avoid the spreads you will end up paying when you roll your contract to the next month. So it depends on your trading model.
The reason not to use options on the other account is the typically large spread between bid and ask in options and you can't sell them outside regular trading hours. The upside of options would be that there is a limit to how much you can lose. But that never comes into play for me anymore when I do these deep ITM trades. Only a catastrophic unexpected crash when I was long could be an issue.
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