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Option Basics – Debit Spreads
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Option Basics – Debit Spreads

by The MoleApril 22, 2016

It’s Friday and thus it’s time for the third installment in our tutorial series on option theory. In the last two installments we we covered options basics and then did our best to give you a head start on how to interpret option greeks. Today we’re going to jump right into debit spreads and explain why they often may be preferable to trading naked options.

Bull Call Spread

The first strategy that we will look at is the bull call spread.

Fig.1 Bull Call Spread

To start with, I’ll give the standard definition seen in most options books or websites, as underscored by the abstract above: This spread involves buying an at-the-money (ATM) call, and selling an out-of-the-money (OTM) call, resulting in a net debit. Time is of the essence here. Maximum risk is capped at the net debit, and maximum reward is capped at the difference in strikes less the net debit. We have one break-even level — the long call strike plus the net debit.

Bear Put Spread

The bearish counterpart is the bear put spread — same type of structure, except this time you’re betting on a decline in prices. It’s composed similarly to the bull call spread but this time we’re buying and selling puts.

Fig.2 Bear Put Spread

More specifically you buy an ATM put and sell an OTM put, thus again resulting in a net debit. Maximum risk is capped at the net debit. And maximum reward is, again, equal to the difference in the two strikes less the net debit. The breakeven is the long put strike price less the net debit.

Alright now hold on. I can literally see your eyes glaze over already. In order to really develop a deeper understanding of how option strategies work it is crucial that you are grasp how two or more options interact and how they may help you to limit your risk and also increase your odds of expiring profitable.

Time Is An Option’s Enemy

Just imagine for a second you are buying an at-the-money (ATM) call. What just happened? Well, for starters you are now in a battle against time. An option by definition is a wasting asset and as such its premium will decay in value every single day, all the way into expiration. If you buy a put you are short price movement of the underlying (i.e. short delta – we cover the greeks another day) but you are still long an option and as such there’s no difference when it comes to time value (i.e. theta in the greeks). As a matter of fact it is time depletion (a.k.a. theta burn) that most option sellers rely on for profitability. They care a lot less about market direction and only to some extent about volatility.

Recall from our first installment that an option’s premium consists of two component: intrinsic value and time value. You just bought an ATM call, so the intrinsic value of that option is going to be barely above zero and over 90% of its value will be purely extrinsic (i.e. time value). Which also means unless price starts to move strongly in your direction your ATM call is going to lose a little bit of its premium every day. And that makes complete sense as an option to buy the Spiders at 200 isn’t really worth anything or much unless the Spiders are actually trading far above 200.

As you can imagine it’s even worse for OTM calls. All their value is purely time based as their premium does not contain any intrinsic value. Of course naked OTM calls have their place in trading as they are great for insurance if for example you want to hedge a short position in the underlying instrument. But buying OTM calls in anticipation of higher prices is usually a losing proposition as price would have to rise far above that call, and that soon, in order for that option to substantially increase in price.

Which is the reason why a lot of professional option traders engage in selling you those OTM calls, full well knowing that they will expire worthless most of the time. Of course that’s the rub – most of the time but not always. Sometimes, perhaps only once every few years, we see a big move that nobody expected. And that is when many naked short option sellers get taken to the woodshed. Because the biggest problem with selling naked short options is that the loss potential is unlimited. Which is the one time retail traders get to enjoy their day of glory (e.g. fall of 2008) as on the flip side their profit potential, as option buyers, is also unlimited.

But ask yourself – how often does that happen? Actually more often than even many professional traders think. There is roughly a 75% chance of one sigma 5 event per year given leptokurtic distribution models which apparently most closely resembles real world models (normal distribution vastly under estimates it by the way, which suggests only every few hundred years). The thing is this however – timing that one day per year plus minus is next to impossible. And that is what option sellers bank on.

Increase Profit Potential And Decrease Cost

There is one key consideration regarding debit spreads in that they involve limited moves. By selling an option at a strike that’s further out of the money, we technically give up certain profit potential. However, since we’re predicting that the move is limited, we’re not really giving up anything, all the while reducing cost. And actually in the vast majority of cases we are actually increasing our profit potential due to much the much reduced cost. Let’s look at an example:

2016-04-22_SPX

A lot of guys are licking your chops about going short the S&P cash right. Admittedly we are starting to push into monthly resistance but I want to be clear that this is not spot where I would attempt to be short. However if have money to burn and would like to lock in some profits then perhaps buying puts here is not the worst idea as momentum seems to be slowing down a little.

So assuming the Spiders close around 209 today and expect the market to go down soon we’re going to look at a few possible put option scenarios. The three profit targets for all of our scenarios are going to be:

  • Reasonable at 200
  • Agressive at 190
  • The Hail Mary at 180

I have actually had to increase the probability from 1 sigma to 2 in order to expand the odds of closing ITM even near 180. Please keep that in mind as we analyze various options and their respective profit potential.

Deep ITM 216 Put Option

2016-04-22_SPY_ITM_put

With the Spiders near 209 the 216P is considered a deep ITM option. You may note its vega which is currently -99.10, and that means it’s tracking the underlying ETF almost at a 1:1 ratio. Here is the possible return on your investment, which most likely underestimates an increase in vega, but at any rate:

2016-04-22_1420

ITM 212.5 Put Option

2016-04-22_SPY_ITM_put_lower

Next we’re dropping down a few strikes to an ITM put at 212.5 with a vega of around 75. Once again here’s the profit projection:

2016-04-22_1425

Not too shabby, so the profit margin on the way down in pure percentage terms is increasing.

ATM 209 Put Option

2016-04-22_SPY_ATM_put

Most option traders usually go for ATM options due to the lower price and as expected vega near ATM is at 0.5 which means they are going to start tracking the SPY at 50%. The profit potential:

2016-04-22_1431

Another reason why option buyers usually go for ATM options is the perceived profit potential. For under $300 the profit curve here looks very delicious.

Let’s Run The Numbers

But does it really? In my not so humble opinion even a drop to 200, given the bullish advance of previous weeks, probably is pretty aggressive. Odds have it that the bulls would defend the recently reconquered 2k mark on the S&P cash aggressively. So statistically speaking our profit potential starts to diminish rather quickly as we’re approaching the SPX 2k mark. And that means an ATM put costs us $289 but only gains us a little over 200%. Hey, that’s a 2R gain, which sounds great but it’s a position you’ll have to hold for almost a month and a lot can happen until then.

If you recall our lessons on system trading then you know that the lower the win/rate ratio the bigger your winners have to be just to get to break even. A significant number of long options (especially puts) expire worthless each month, which represents a 1R loss. Do you recall how to calculate the break/even point?

n = Success Rate in %

b = Break Even Risk to Reward Ratio

2016-04-22_1450

Alright, let’s be generous and say that 60% of all put options expire OTM, that would mean n (the success rate in %) equals 40. And 60 / 40 = 1.5. So just in order to break even over let’s say 100 of your put transactions you would have to bank 1.5R at minimum. I think the win/loss rate is actually lower but perhaps you’re better than most and even then you require at least 200% winners just to eek out a respectable profit of 0.5R over 100 campaigns. It’s not a bad system but let’s not forget another inconvenient fact that most option traders are oblivious to – the odds for consecutive losers:

2016-04-22_1459

For a win rate of only 40% the odds of experiencing 9 consecutive losers over 100 campaigns statistically speaking has a chance of about 60%. Given 250 campaigns it’s 91% and given 500 campaigns it’s 99%. Most retail traders do not abide to proper position sizing and regularly risk quite a lot more of their assets to one campaign than just the 3% I selected as 1R. And if you hit 9 consecutive losers at 3% it means you lost almost 25% of your trading capital and have to make 130% just to recoup your losses. If you trade 5% position sizes then you lost over 35% of your assets and need to make 155% to get back to where you started.

I think you are starting to get my point, which is that in order for you to make money with naked options you must a) either bank 2R winners on average or b) increase your win rate substantially above 40%.  You think you can do that?

Naked Options Are Honey Traps

And this exactly the honey trap that newbies tend to fall into.  You want cheap options with outlandish returns, but in reality, this unlimited return will happen only very rarely (e.g. 1 out of 100 times). You know how this goes and I’m sure you’ve been there yourself in the past.  You pick up an ATM option with an intention of making a quick money, but the moment you get in, the market starts to go against you.  You don’t want to get out of the position until you break even, so you decide to hold on to your position.

A couple of weeks passed by, and SPY comes back to your entry price.  In the meantime, you’ve lost a ton of money on a time decay and wind up getting out of your position with a loss, instead of taking an “unlimited” gain. So, while I’m not totally discarding naked puts as a strategy, I think in most cases there is a better long term approach which may not bag you the 10-fers you dream of but put you on the path to banking consistent coin via a systemic approach that clearly defines a win/loss range and is less sensitive to theta burn or gyrations in vega (topics we have not even discussed in the context of naked options).

209/200 Vertical Put Spread

2016-04-22_SPY_vertical_put_spread

So what we’re doing here is to buy a put at 209 and at the same time sell one at 200, which establishes a debit spread. The cost of this campaign is 2.13 which is lower than that of a naked ATM put. So that alone reduces your cost of entry and especially if you have a smaller trading account allows for more precise position sizing. If you want have a $100k account and only want to risk 1% (advisable) on this then you would be able to 9 of those suckers.

2016-04-22_1523

On the ROI projection we see that getting to the 200 mark nets you a little under 180%. Yes, that’s less than for the naked put but remember that after about 205 time decay (i.e. theta) actually starts helping instead of hurting you. The longer it takes to get to 200 the more you make on theta. It is true that a rise in volatility will hurt you a little but unless you timed your purchase perfectly a lot of that is most likely offset by the lack of theta burn. Only an almost instantaneous drop would make a naked option the right choice here. So if you have a crystal ball at home then that’s most definitely the way to go 😉

How To Pick Your Strikes

You’d be surprised to learn that most professional option traders rarely glance at a chart. Well, at least not the type of chart you are used to looking at. Instead they look at what’s going on in the option chain, so let’s see what’s going there:

2016-04-22_spiders_chain

And here it is – we’ve got the calls on the left and the puts on the right. Now look at the open interest columns. Despite current bullish tape we’re seeing some pretty significant activity around the 205P and the 200P. So quite a lot of market participants seem to be putting money on a bet that prices will drop toward either 205 or 200 in the next month. That is quite an aggressive assessment if you ask me, especially given all we learned about theta burn in the last month of an option’s lifetime.

But without even looking at a chart you are able to get a pretty good assessment of price levels that market participants perceive as being significant. If you can line them up with technical support levels on your charts then even better. However given the lack in technical context on my own charts, meaning according to my personal lens of the market, I must conclude that even a vertical put spread right now right here has only limited odds. In addition I don’t see too much clustering on the put side of the option chain. It’s understandable that we have a more significant OI around the 200 mark but it’s only about 150k and that’s not a hell of a lot. There is barely anything around 201 or 202 and that IMO is a bit suspect and suggests that the 140k is mostly composed of retail traders.

Realistic Expectations

What have we learned today? First of all before even thinking about trading naked options or directional strategies such as vertical spreads we should make a realistic assessment of the current trading environment. What are the odds of a reversal and how deep do you expect this reversal to be? What is your conservative/moderate/aggressive price targets?

We have also learned that buying options in general has a low win/loss rate and that a significant number of them expire worthless. That in turn affects our minimum win/loss rate and as such we need to increase our odds of success as much as possible. Unlike being long in the futures or forex markets buying options puts us into a race against time. And that means our position loses money every single day in sideways tape. A vertical spread keeps us out of the time race and actually helps us assuming that prices move at least somewhat in the direction of our price targets. Which may allow you to get out at or near break/even should market behavior indicate that the odds of reaching your target are diminishing. So in other words choosing vertical spreads instead of naked options offers you more flexibility as market conditions change.

Trading A System Of Options

Finally from a purely systematic perspective vertical spreads allow us to more precisely evaluate our benefit to risk ratio. It’s just not realistic to think in terms of ‘open ended’ returns – when trading any systems, options included, you must know what your targets are. Without profit targets you don’t know when to exit your campaign and one of our prime directives here at Evil Speculator is that you never enter a trade without knowing where/when you will exit it. If you choose for example to take partial profits at 2R and keep the rest until 3R then that is a system you can factor and statistically analyze over time. Which will allow you to track your win/loss rate, your average expectation (or SQN), your standard deviation, your consecutive losses/wins, average loss vs. average win, etc. etc. Which are topics I almost never see addressed when it comes to trading options. It is quite possible to trade a system of options instead of just trading options. The difference between the two is profound and we will spend quite a of time on this in the weeks and months to come.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Ronebadger

    Kinda mixed right now:
    NDX -1.63%
    RUT +0.74%
    SPX -0.11

  • Yoda

    Damn! What a wealth of info! I got some homework to do this week-end. Thanks mole.

  • mugabe

    very educational post, Mole – you put a lot of work into that

  • mugabe

    check out the yen!

  • nyse

    This is seriously one of, if not THE, best sites out there. Nice post, great explanation, TY

  • ridingwaves

    damn, I learn more here than at work…great post

  • ridingwaves

    thinking out loud, the market has priced in the hold steady meme from the fed but I doubt it’s priced in a .25 raise.. it’s a stretch but stuff happens…

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    and yet you keep trolling zerosledge.

    how do I know that?, oh, uh, I, never-mind!

  • Round we go

    nikki up 2.4% and NQ down 1.3% , nothing to see here.

  • Round we go

    guess china is attacking zeroedge, its been down for too long.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Friday’s quote:

    In a bet there is a fool and a thief. ~Proverb

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    works for me.
    check your router. is the light blinking?
    😉

  • Round we go

    see your want to be judgmental about it. no in a bet, it is gambling. no right or wrong. just an out come.

  • Round we go

    i hate you. you act like your luke skywalker. but your just a ego inflating retard, and does not know it.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    QID position, not going so well?
    I feel for ya.
    really do.

  • Round we go

    see your an asshole. plain and simple. I am not worried about the unicorns crashing. a life long friend that I used to work at Disneyland is the 80’s has become a partner at Microsoft. he and i have been on opposite page for quite sometime now about the system, cus although he knows the retarded-ness, he was too inside. well now we are on the same page.

  • Time Bandit

    My Long GBP/JPY is up almost 500 Pips at this moment. Short Corn is doing well too! :)

    I am soooooooooo glad to have stuck with the energy sector (Crude and Oil Companies) and have now added soft commodities to go along with my favorite horse the GBP/JPY. I’ll leave the equity indices to those who can trade them because I sure as hell cant.

  • Mulv

    great post, Mole! thanks

  • Time Bandit

    No need to fight boys, there’s plenty of money around for everyone. :)

  • ridingwaves

    energy companies seem to have gotten a lift here..
    ever since the banks set aside reserve for losses that I mentioned here, oil has risen….coincidence I think not….

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    ok Mom.

  • Billabong

    Mine modem router link light is blinking with intermittent connectivity … replacement time. Must be 4 years of almost non-stop use … Time for another technology tombstone in the garden next to the pets.

  • Time Bandit

    I’m probably not the best one to say anything about talking shit because I have a pretty short fuse myself. However, I’m just doing my job.

  • Yoda

    Keep it clean RWG. You reached a point where your emotions have taken over your ability to think rationally. I suggest you close your positions and step back from trading for a while until you cool down.

  • Billabong

    That is a really nice currency trend position.

  • Billabong

    position
    It’s probably more about cash flow and burn rates … rising oil prices can cover over a multitude of financial sins.

  • Time Bandit

    Just booked 2R profit on Short Corn. It probably has a lot more to run but I’ve got to leave for the day and a bird in hand and all that rot. . .:)

  • Billabong

    I’m glad we worked through our biases lesson 3 years ago. I found it makes me more tolerant of different ideas and forces me to see the other side of a position. Of course, building a reliable system and understanding what markets it works best in also helps.

  • Billabong

    Ah yes … GC continues oscillating in the 1200-1250 range

  • Round we go

    thats the thing TB, I keep saying I am not in it for the money. I am in it to have fun and do what is in my nature. win or fail. either way I win :)

  • Yoda

    I am very close to my “uncle” point with my long PM positions.

  • Billabong

    Ed Seykota … “Everyone gets what they want out of the market…”

  • mugabe

    dollar’s decded to perk up against everything

  • mugabe

    I don’t … still looking for those triple digit returns :)

  • Billabong

    DX is sitting right on the 25 EMA.

  • Round we go

    nice fitting rules dont seem to apply in real life. it more like you get, what you get. and seriously, I have had way more than my fair share. I want to do the least amount of damage now, although it may not seam like it to most.

  • Billabong

    You have an R SL? Anyway, it’s the strengthening dollar that is the PM problem today.

  • Yoda

    R SL?

  • mugabe

    whether you’re right in the end with your position or not, going 200% all-in on one idea is not consistent with wanting to do the least amount of damage.

  • mugabe

    well .. not against crude

  • mugabe

    to be fair to him, he has been bated

  • Billabong

    Remember 2007-08 …. most of us nearly went broke betting it was the big one. It was even worse than that 2004-06 when the builders and lenders were obvious shorts … 2004-08 was a freaking one-two punch … luckily, most of us here were survivors.

  • Round we go

    i dont believe in timeouts. your just delaying the lesson if there needs be one. commit and learn, that is my motto. but I have always been able to regenerate more than I need from nothing.

  • Billabong

    That’s why we keep every position (including equities) at a low percentage with an R SL 1 for loss (gap downs or up don’t count … LOL).

  • Billabong

    Risk exposure stop loss … Vann Tharp has a great video tutorial (YouTube or VT’s website) on using / determining R. Once you get used to using it, tracking risk and understanding your exposure becomes really easy … understanding / using it was an epiphany for me.

  • ridingwaves

    I sold some miners on tuesday…will buy back in after fed meeting…metals usually get knocked around before the meeting, sometimes not…but odds favor it…
    the charts are bullish but short term I would think they could scare newbie commodity trend traders around…

  • Round we go

    how many times I have to say. this is a hedge account. I have other assets and cash. this is insurance to keep my asset value and to make actual investments into new projects after the rest of credit.

  • Billabong

    Individual miners have a big earnings week next week.

  • Billabong

    Maybe you should include the long positions in the discussion and not leave the audience with the impression you want to blow-up …. just an idea.

  • ridingwaves

    most of them have great bullish PF charts but when the media says its a great time to buy gold in mass, I tend to reduce exposure..

  • Yoda

    OK thanks. Yes I do have one, however I do not use the “R” method.

  • Billabong

    Wise decision.

  • Yoda

    uncle point reached. out of GDX and NEM. It was fun while it lasted, but time for me to book profits before they disappear.

  • ridingwaves

    yeah, that rhythm method added a couple sisters to my family, I don’t use it either

  • ridingwaves

    the widow maker is alive….if it holds here 2.5 next

    a contrarian summer trade….

  • mugabe

    so presumably you would be happy enough if your hedge proved a disaster as you think your real estate would compensate for it?
    if it’s a longer term hedge, why have a stop loss?

  • ridingwaves

    it was the big one but they played some many tricks on people that had it right, few made it big…they were literally pushed out of positions by overnight changes made by govt. and the fed., changes that were never apparent or used and you couldn’t trade against…the Bernanke put has not expired…too bad CB’s have not learned that everything they are doing is not helping anyone but the rich….

  • captainboom

    People who use the rhythm method are called ‘parents’.

  • http://greenlander1.blogspot.com/ Greenlander

    Thanks Mole. Looking forward to advice on campaign management when short spreads.

    On a side note, another going nowhere week w 4 trades

    -1R QQQ long entered yesterday a/h (stopped out this morn)
    -.5R TVIX short
    +1R SPY long
    +.5R SPY short

    open trades (from this morning)
    TVIX short
    SPY long
    IWM long

  • saltwaterdog

    Figured I’d post one final Beers On Me RBT Update before riding off. The key point of this chart is the draw – both in R terms and in time, it was a long one. I’ve traded other systems that weren’t the right fit for me and I didn’t survive draws like this because I started to tinker… with this one, because (to borrow Ivan’s term), the DNA is a great fit for me.

    Thanks to ES for introducing me to Ivan, with whom I’ve learned an amazing amount over the last two years privately. I hope ES remains a great forum for discussion. Best of luck to everyone.

  • ridingwaves

    good luck Saltwater on your continued journey
    best of luck in trading and life….

  • http://evilspeculator.com Sir Mole III

    Muchísimas gracias señor.

  • Billabong

    LOL ….

  • Billabong

    Good decision. I closed out my ABX and SLW positions for a combined 4.5R. Once they started moving that was it … I’ll take another look at miners next week .

  • ridingwaves

    excellent trade BB

  • Mark Shinnick

    As a objective targeted some time ago, this general TVIX 3.5 range is proving somewhat durable and very tight stops are possible. I’m stabbing at it for position. However…its running out of time. In any event, its a defined range limits risk quite well. Personally, I’m hoping for a bit lower local low than the last couple of days….so see what happens.

  • Yoda

    I bought GDX and NEM on Feb 17th for 17.74 and 24.47 respectively, and sold them today for 22.54 and 31.16 respectively. I am very happy with my results but do not want to overstay my welcome when the trade goes against me. I won’t re-enter the PM trade unless Gold’s high of yesterday at 1272 is breached. Price action over the last 2 days in DX looks strong, but I want to see if we get continuation of today’s move on Monday.
    There are juicier trading opportunities than PMs right now. I have entered a speculative (lottery ticket) NDX short today with SQQQ at 18.46 which I intend to hold over the W-E. If the trade is successful, I’ll add to the position.

  • Yoda

    Well done. Enjoy your gains and anxiety free week-end.

  • Time Bandit

    From Billabong way down below:

    “Remember 2007-08 …. most of us nearly went broke betting it was the big one. It was even worse than that 2004-06 when the builders and lenders were obvious shorts … 2004-08 was a freaking one-two punch … luckily, most of us here were survivors.”

    I remember the above like it was yesterday. And you can throw in 2009 and beyond when a lot of us believed Robert Prector and his EW fallacy of Primary Wave 3 Down. Well it’s only been 6 Years and P 3 is still not here yet. If it ever does come, the EW guys will say “see I told you so, but it’s too bad everyone went bankrupt.”

    One of the best things that happened to me from the above occurrences besides just barely surviving running these gauntlets is that I learned to try to not let anything I read influence my trading decisions. This is still something that I have to fight hard to resist.

    The price patterns on my charts should be all I need to know in the short term. And what ever happens in the longer term should be given a “heads up” by happens in the shorter term.

  • http://evilspeculator.com Sir Mole III

    Hear hear…

  • Yoda

    I like Peter Brandt’s speculative L-T view about DX:

  • http://evilspeculator.com Sir Mole III

    Are we talking credit spreads? We’ll cover those next.

  • http://evilspeculator.com Sir Mole III

    I’m posting them several days apart so that you guys can digest the info. Use the time!

  • http://greenlander1.blogspot.com/ Greenlander

    Great. Yeh I have sold some credit spreads as directional plays to take advantage of theta burn and have had some success but I am sure my management isn’t optimized as it could be.

  • rmwaddelljr

    Generous at 40% win rate: Would you say realistic at 30%? What would be reasonable? Making a system of it makes sense. Still takes discipline to persevere with any system.

  • phylum

    An EqC and W/L histo?

  • phylum

    I’ve just tracked down Ivan’s book “Listen to the Market”, has taken a while but definitely worth the wait.

    I’ve recently become aware there’s a pdf of his book available online of which he has generously offered 100% of the proceeds are going to the Vanuatu people to aid in the recovery from cyclone Pam last year which is still ongoing.

  • mugabe

    interesting …

  • mugabe

    Anger at new highs or because of a correction or bear market is
    symptomatic of process-free investing. I know this from experience, and
    I’m thankful for this experience even though it felt terrible at the
    time. It taught me what not to do.
    One of the things I am thankful for personally is that I stopped playing the guessing game professionally about where markets were headed roughly six years ago.
    Rules-based investing isn’t a silver bullet, nor will it ever remove
    the discomfort that every market participant is forced to feel from time
    to time. But having a rhyme and reason, laid out in advance, for the
    decisions you will and will not make, is utterly priceless in comparison
    to the alternative.

    http://thereformedbroker.com/2016/04/20/anger-at-18000/

  • Billabong

    UPDATE: NYSE Summation Index is now approaching +1200 (+600 is considered OB – we haven’t seen 1200 since 2007-08) and NASDAQ is over +500 and heading towards +600 (last time it was this high was the summer of 2013). The Bullish Percent Indices (BPI) saw another sector slip below 80%. 5/12 are now below 80% … It’s moved from 17% below 80% to 41% in the last few weeks. The summation indexes and BPI by themselves they are meaningless, but they are part of the entire package of warnings and indicators for both directions.

  • javier

    NYSE summation index was 1400 in 2012 and SPX climbed another 100 points before pulling back. It was also 1200+ in 2013.

  • mugabe

    basically we’re seeing some big sector rotation out of defensive sectors – hence that XLE chart below, for example. That is bullish on the face of it. Another bullish factor is that sentiment is quite/very bearish – saw this on a graph recently but don’t have the link.

  • Yoda

    Wouldn’t it be evil if the FED hikes on Wednesday? Apparently, expectation of a hike to 0.75 at the April 2016 FOMC’s meeting is only 2.3%. If that were to happen, that would be bwahahahaha kind of evil. 😉

  • javier

    I don’t want to politicize this but interest rates will stay near zero until Hillary is elected president

  • ridingwaves

    Gold/silver opx on Tuesday…

  • Billabong

    Ratio adjusted version? In the ratio adjusted version, they were the peaks for each of those years.

  • Billabong

    Interest rates will go up when they need to strengthen the $$$$….

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    INDEED

  • tandaradei

    Wow, this tutorial is way better than I imagined, thanks so much!