timwest
Long

S&P500 SPY YEAR-END OPTIONS GRAPHED

AMEX:SPY   SPDR S&P 500 ETF
2020 27 32
2 months ago
With the S&P500             ($SPY) at 215.04 last as of Friday, October 7, 2016, you can see the price of various options.

I started at 215 which is "at the money" and the prices above that are the call options, since those are "out of the money". I made the call options green, since they are for upside price action. I then graphed the put options prices from 215 and down and made them red, since they are for downside price action.

What you can see is that it costs a lot more to protect against a market decline than it does for a rally. In fact, if you had $1.65-$1.70 to spend on a CALL option, you could get one that was 3.2% out of the money. But if you bought a PUT option instead, you'd have to get one that was 9.3% out of the money, which is ALMOST 3 TIMES FURTHER OUT OF THE MONEY.

Basically speaking you'd have to monitor this every day to see what was a "normal" amount of skew, or price difference between puts and calls that are out of the money. But I think you can see that this is a pretty extreme reading at first glance. The fact that they are different in price is more of a function of how people use options and who initiates the trade to price the option.

Let's walk through the basics:
A put buyer enters an order to buy a put, which gives a put seller the chance to sell. Once the transaction has occurred, the "put seller" generally would prefer to neutralize the position by either selling short a fractional amount of the index , or go out and purchase other put options to hedge off the risk. So after awhile, a market for options that looks like this would imply that a lot of hedging has taken place and nervous longs and bearish speculators have already built their positions and are protected against a market decline. What I would also expect out of an extreme reading like we have now, is that any sharp decline would find a bottom quickly because the hedges are already in place. This is not to say that we can't have any declines, but you wouldn't expect to see a cascading decline or a massive collapse with this much hedging already in place.

It looks to me that the market will more likely edge higher to the 220-225 area into year end as a much more likely possibility to the 198-206 area. The odds are better than 2:1 that this is true, from the way that I see it.

Have a great weekend and hope to continue doing this analysis each weekend until it shows a bearish signal.

I'll be in KEY HIDDEN LEVELS chat room during the week if you have any questions or feel free, of course, to post questions here.

All the best,

Tim
11 days ago
Comment: November 29, 2016 UPDATE WITH SPY AT 220.91
If you pay about 0.9% premium on either side, calls are half the distance from the market. Whereas before it was one-third the distance. Down-spikes find support when put premiums are expensive. The next level is to look for open interest and see if there are any high open interest levels.
snapshot
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Benji PRO
2 months ago
I would argue this is the normality of a regular put-call skew and instead we should be looking at the deltas of different levels to access where the market has priced in where we may go.
+2 Reply
timwest PRO Benji
2 months ago
Perhaps. I think this picture provides a deeply intuitive view of sentiment that shows a high level of bearishness and skepticism about price levels. The "wall of worry" is clearly visible this way. Normal in a bull market, or a "very low chance of a bear market" pattern.
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IvanLabrie PRO
2 months ago
This is really powerful, great insights as usual Tim.

I've checked the linear regression channels we can obtain from connecting different FOMC meeting dates:

snapshot


Interestingly, the last one is the first that is pointing down. (also added the FOMC key levels, and the VIX spike 75% retracement key levels)
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timwest PRO IvanLabrie
2 months ago
I like to draw LRC's from the lowest low to the highest high and then if that channel breaks, go from the highest high to the lowest low until that channel breaks. It's very logical and intuitive that way.
+1 Reply
IvanLabrie PRO timwest
2 months ago
Yes, really useful.
+1 Reply
flrtrader
2 months ago
This would be an awesome chart "IF" you layed open interest over it.
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timwest PRO flrtrader
2 months ago
I agree.
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timwest PRO flrtrader
16 days ago
@flrtrader, I used to plot that for myself and my trading team back in my S.G. Warburg days in NYC. High put open interest is important support on declines. High call open interest is resistance on rallies. Logical too because once people have the options going their way, they stop buying or selling and the trend weakens. Open interest & pricing are extremely important. We are always trying to derive who has what positions in what market, but it's impossible really.
+1 Reply
G13Man timwest
10 days ago
@timwest,
Bernie Schaeffer options note that PUT options below current price gives support , two similar comments on same idea , andi actually can see it , thanks
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elp
2 months ago
TY Tim. This is great post!
+1 Reply
S_A
2 months ago
Hi there, I am still a novice in TA, so if you think my question is not justified please ignor it.
Todays candle has just made a Break down from a symetrical triangle that has its base on the 9th of Sept. Is that some thing to consider or would that be invalid for some reason.. appreciate comments..
/SA
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timwest PRO S_A
19 days ago
@S_A, Sorry I am just seeing your question now. Sometimes questions get buried. If you don't get a reply, just send me a PM and I'll be more likely to receive that. As for the "triangle breakdown", yes, there are lots of small patterns that catch the attention of everyone and they have an effect on psychology and trading, but I find them to be low probability of success because everyone sees them. It helps to have a unique view of the market and a strong ability to not care about being "right" or "wrong" on a trade and instead just take the trades that you see from your patterns. In other words, it's good to be aware of everything, but you have to trade "uniquely" to you and keep your eyes open and ADD to your winners after you have built up a little cushion of profits on the year. Good fortune to you on your adventure in the trading business!
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S_A timwest
16 days ago
@timwest, Thanks for your reply, a very good answer indeed, I appreciate your advices too. Trying to clime the ladder step by step, but as you stated above, it is not easy for a beginner to avoid all distraction whether it is news, or chart pattern.. Anyway thanks again.
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timwest PRO S_A
16 days ago
@S_A, Indeed. Trading is all about avoiding or managing distractions. Manage risk so you can survive in the game while you learn. It's not about making a ton of money, but rather about managing your trading size so you can handle losing periods and staying in the business. If you get a chance, read any of Jack Schwager's books on the markets and trading. There are many stories of how to make it and they all have a common thread. Hint: money management. In other words, you could have the best system in the world and lose all of your money if you don't know what you are doing. Enjoy and thanks for your comments. & Happy Thanksgiving!
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S_A timwest
16 days ago
@timwest, happy thanksgiving day to you too,.. I must admit that I am still struggling with position sizing and as you mentioned above, money management is a major component in trading. I understand there is no short cut here, and three months of study TA is not much I am afraid, but it is fun, with a full time jobb, and family not much time left for other things.. thanks again for the litterature advide, and hints about money management. Enjoy your Thanksgiving and Black Friday..
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IvanLabrie PRO
2 months ago
This is getting out of hand:

snapshot
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Reekardo IvanLabrie
13 days ago
@IvanLabrie, $SKEW was bearish going into election and vix-spx ratio was massive high - this is just a major short squeeze for another range bound december.
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IvanLabrie PRO Reekardo
13 days ago
@Reekardo, possibly, yes. We succesfully rode the squeeze for now, and I'm flat SPY atm.
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drshoe PRO IvanLabrie
11 days ago
@IvanLabrie, thanks for the graph. how do you produce this graph on tradingview. would like to know. is it part of your indicator package subscription?
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IvanLabrie PRO drshoe
11 days ago
@drshoe, You mean the options graph Tim posted? That's a manual drawing.
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Reekardo
13 days ago
how is it looking now? $SKEW is still slightly bearish, maybe almost neutral now. possible trading range until inauguration, if he makes it alive until then.
+1 Reply
IvanLabrie PRO Reekardo
11 days ago
@Reekardo, indeed.
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Reekardo IvanLabrie
11 days ago
@IvanLabrie, seller failure today... thats bad for bears. open range resets on thursday on SPX. confirm on friday if december is bearish or bullish.
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timwest PRO Reekardo
11 days ago
@Reekardo, I'll update the graph and see how it looks. When this graph was made the election and earnings were foremost in our minds with all of the associated nervousness. Now that's gone. You can see why this was "constructive" to have options priced this way with this much skew.
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Reekardo timwest
11 days ago
@timwest, sure feels like they want everything under 2200 expire worthless until december opex. lets see how open range sets on DEC 1st and what direction this goes after that. something tells me they are going to go for the quarterly pivot resistance 2216 on spx cash. if they tag that, then 2230 and 2265 are in play.
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Reekardo
11 days ago
can you give an example of the 0.9% premium? do you mean the equivalent to a 1% move of spy? the ATM straddle?
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kenny1924
11 days ago
I have just started to play the uncovered SPY Call Sells (OTM) and SPY PUT Sells (OTM) to make some weekly income and it is working out OK. I have not figured out a few key things like 'best day to do this during the week', 'how far to go OTM', 'when to close it out' (or let it expire), 'when to play SPY vs QQQ for the same strategy', and 'why not play both' (candle burning at both ends makes the room brighter but could also burn hands)!
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