Monthly Archives: October 2015

Making Money in a Sideways Trend

In a nutshell, there are 3 basic things you can do with options:

1. Leverage a market (direction) opinion

2. Generate income

3. Profit from sideways price movement

This piece will focus on #3.  Please note that as always, the example detailed in just that – an example – and not a recommendation.

See also (Jay Kaeppel to Speak to MTA Chicago Chapter on 11/10)

Strategy: Iron Condor

An iron condor is an option trading strategy that attempts to make money when the price of the underlying security remains within a particular price range.

If the price of the underlying security remains within the particular price range then the trade makes money.  If it moves outside of that range the trade must either be exited or adjusted or else a loss that is (typically) in excess of the potential profit on the trade may occur.

There are many factors that a trader may consider when looking for an opportunity to use the condor strategy, but two of the key ingredients are:

1. Price action within an objectively identifiable range: This establishes a high and low for a price range and also helps to identify key price levels where action may need to be taken.

2. Above average implied option volatility: The condor strategy involves “selling premium” and the maximum profit potential is established at the time the trade is entered.  The higher the implied volatility for the options the more premium that the trader takes in by selling options, i.e., the greater the profit potential.

Ticker: EWZ

In Figure 1 we see that EWZ is presently trading within a price range roughly bounded by $26.14 on the upside and $20.06 on the downside.  So we will look for a potential condor that can profit if EWZ stays with that price range.1Figure 1 – EWZ in a trading range? (Source :

In Figure 2 we see that implied option volatility (the black line superimposed over the daily bar chart) is just coming off of an extremely high level.  Remember, the higher implied volatility, the more time premium is built in to the price of the EWZ options.  This chart tells us that this may be a good time to sell premium using EWZ options.2Figure 2 – EWZ option implied volatility at the high end of the range (Source:

The Iron Condor Spread

I used to find the condor spread trade displayed in Figures 3 and 4.  I simply sold the call option closest to the range high (26) and bought the next $1 higher strike (27).  I also sold the put option closest to the range low (20) and ought the next $1 lower strike (19).

I assumed  willingness to assume a maximum risk of $2,500.

This position involves:

*Buying 30 November 27 calls @ $0.12

*Selling 30 November 26 calls @ $0.22

*Selling 30 November 20 puts @ $0.18

*Buying 30 November 19 puts @ $0.11

The particulars appear in Figure 3.

3Figure 3 – EWZ Iron condor details (Source:

A few key things to note:

*The breakeven prices (assuming the trade is held until November option expiration) are $19.83 and $26.17.

*The maximum profit potential is $510 and will occur if EWZ is between $20 and $26 at November option expiration.

*The maximum loss on this trade is -$2,490 and would occur if the position was still held at November option expiration and EWZ was above $27 or below $19.

*The maximum profit % is 20.5% ($510/$2,490).

The risk curves for this trade appears in Figure 4.  The breakeven prices are highlighted.4Figure 4 – EWZ Iron condor risk curves (Source:

What to Do Once the Trade is Entered

*In a perfect world, we would simply sit and wait for our profit to accrue while EWZ trades sideways within our upper and lower breakeven prices.  And this often can be the case.  The problem is that occasionally trouble intrudes as price decides to make a significant move in one direction or the other.

*If price moves far enough the risk curves begin to slope downward enough to start incurring a significant open loss.  As a result, a condor spread IS NOT a “set it and forget it” type of trade.

*The key is to have in advance some idea as to what you will do price approaches or exceeds one of the short strikes and/or if a loss begins to accrue.  Whether to “adjust” or “cut bait” is a personal choice based on a lot of factors.  Adjusting an existing position is something of an “art form”, but doing so can keep you from getting stopped out just before price reverses back towards the middle of the target price range.

*For sake of example, in our EWZ trade a trader might decide to simply exit the trade if either of the short strikes ($26 or $19 are reached).  Another alternative might be to target those areas where the risk curves “meet” just beyond the breakeven levels (roughly $26.60 on the upside and $19.50 on the downside).  The net result of this approach would be that the trader risks roughly $1,000 in order to make $510, with the knowledge that the ETF price must move roughly 15% in either direction over the next 24 days in order to trigger this stop-loss.


Once more, I am not “predicting” that EWZ will in fact remain between $20.06 and $26.14 for the next 24 days nor that this trade will ultimately make money.  This is simply an example of a trade that exhibits some of the key ingredients that option traders should look for when considering an iron condor (i.e., an objectively identifiable price range and high implied volatility).

For traders who know what to look for and are willing to act if need be after the trader is entered, the condor spread offers the opportunity to make money even as the price of a given security drifts sideways and/or remains locked within a particular price range.

For individuals looking to expand their realm of money-making opportunities, it might be worth a closer look.

See also (Jay Kaeppel to Speak to MTA Chicago Chapter on 11/10)

Jay Kaeppel

Another Crude Update…

Hello folks, I have been a bit “out of touch” recently.  Busy with a few “things”.  Also a bit out of sync with the markets.

See also (Jay Kaeppel to Speak to MTA Chicago Chapter on 11/10)

Most of the longer-term trend following stuff that I follow has been on the wrong side of recent action in the stock, bond and gold markets. This is not uncommon since trend-following indicators by design are not going to ever catch a top or a bottom.  However, when I feel like I am on the wrong side of everything I tend to comment less about the action in the financial markets.  I mean, why look stupid on purpose, right?

In a nutshell:

*One of the key (and simplest) trend-following indicators I use for the stock market gave a “sell” signal at the end of September – and the stock market has been marching relentlessly higher ever since.

*One of the key trendfollowing indicators I use for the bond market remains firmly bullish but the long-term bond is essentially unchanged over the last 12 months.

*One of the key trend-following indicators I use for the gold market remains bearish even as gold and gold stocks have rallied sharply over the past two months.

So while I may short-term trade any of these markets in either direction, in terms of longer-term investing I am simply “out of sync”.  For the record, it happens sometimes.

Crude Oil Update

I have been sort of fixated on crude oil lately.  I wrote about a potential bearish play here and here.  Following the second update crude broke through the lower end of the range that I highlighted as seen in Figure 1.1Figure 1 – Ticker USO (Courtesy:

The trade that I wrote about in the first piece went from “close to serious trouble” to “a much better place”.

The example bearish crude oil trade I highlighted on 9/30, involved:

*Selling 30 November USO 16 calls

*Buying 30 November USO 17 calls

The current status of this trade is reflected in Figures 2 and 3.2Figure 2 – USO Bear Call Spread Details (Courtesy:

3Figure 3 – USO Bear Call Spread Risk Curves (Courtesy:

*As you can see, with 31 days let until November option expiration, the trade still has quite a bit of profit potential yet to be captured.

*In the meantime, the breakeven price is $16.21 a share for USO (presently trading at $14.73) with a stop-loss somewhere in the $16.50 range.

See also (Jay Kaeppel to Speak to MTA Chicago Chapter on 11/10)

Jay Kaeppel

All Eyes on Crude Oil “In the Zone”

Looking at ticker USO as a proxy for crude oil we see that price is presently within a key support and resistance “zone”.1Figure 1 – Ticker USO with key support and resistance levels (Courtesy:

As you can see in Figure 1, the price range bounded by $15.61 on the lower end and $16.45 on the upper end has served alternately as support or resistance on various occasions.

Classic technical theory would suggest that:

*An upside breakout above $16.45 would suggest higher prices to follow and;

*A downside breakout below $15.61 would suggest lower prices to follow.

If you want to trade oil, keep a close eye on these price levels in the hours and days ahead.

Jay Kaeppel

It’s All Hanging in the Balance RIGHT NOW!!!

Everything that was “down” is “up.”  Will it hold?

As a trader and/or investor you need to be paying close attention RIGHT NOW (!!!) to see what happens next.  Because what happens next may determine the overall trend(s) of things for some time to come.

Where We Stand

In an nutshell, many, many market that recently flipped in to a “downtrend” (i.e., price fell below a long-term moving average and/or a shorter-term moving average such as the 50-day average recently dropped below a longer-term moving average such as the 200-day average) have rallied sharply in the last week or so and are now “overbought” (based on any number of standard and not so standard overbought/oversold indicators).

This includes – but is not necessarily limited to:

*The major U.S. stock market averages (SPY/DIA/QQQ/IWM)

*A host of non-U.S. stock market averages (


*Metals and mining stocks

A variety of charts appear at the end of this article so please be sure to scroll to the end.  WAIT!!!!! What I meant to say was “please keep reading to the end” (Thank You!).

So one of two scenarios is most likely about to unfold:

1. The “bottoms are in” and the recent upside reversals will serve as a “launching pad” of sorts for future gains in the months ahead.

2. Everything (figuratively speaking) is about to reverse back to the downside

Most of the charts below highlight the:

*Current overall trend (mostly “bearish” based solely on moving averages)

*The current “overbought status” (with an indicator or bearish Elliott Wave count highlighted)

*The “line in the sand” (i.e., the recent low)

What to Watch For

So here is what you should be watching for:

*If markets DO NOT reverse back to the downside soon then it is likely that some major bottoms are in place (particularly in  the stock market where the seasonal calendar tells us that from late October into January is the most bullish time of year for the stock market).

*If markets do start to reverse back to the downside:

1.Traders may consider short-term bearish trades intended to make some money if recent lows are retested and/to make a whole lot of money if recent lows do not hold

2.If markets reverse to the downside from here and take out recent lows then:

3.A serious bear (global) market will be confirmed and investors must be doing something besides just “holding on and hoping for the best”.


So to sum up what I basically have said so far:

“Either things will go up or they will go down”

So you’re thinking “Thanks Jay”.  Now this is the point where as a “professional market analyst” I should insert my “prediction” as to what I expect will happen and why.  And I would love to but the truth is that I am not too good at predictions.  Hence the reason I focus on trying to:

A) Respect the major trends (i.e., not just “holding and hoping” when a potential downtrend begins to unfold)

B) Trade the shorter-term trends – be they bullish or bearish

Lots of opportunities are setting up at the moment.  I will be watching closely to see which scenario plays out and will act accordingly.

I suggest that you do the same.


U.S. Stock Indexes

1Figure 1 – SPY (Courtesy: ProfitSource by HUBB)

We see that:

  1. The price trend is “bearish”
  2. The Elliott Wave count is “bearish”
  3. The 3-day RSI reached “overbought” territory

According to “classic technical analysis” this market “should” reverse to the downside and retest the “Line in the Sand”

Whether it “does” or “does not” do what it “should” do will provide incredibly important information going forward.

Non-U.S. Stocks

The same holds true for many foreign stock indexes.  See ticker EFA in Figure 2.2Figure 2 – Ticker EFA  (Courtesy: ProfitSource by HUBB

Crude Oil

Crude oil (using ETF ticker USO) is rallying sharply and is about to test a key resistance level at $16.50 a share.3Figure 3 Ticker USO (Crude Oil)  (Courtesy: ProfitSource by HUBB


Silver has rallied strongly and the ETF ticker SLV has moved slightly back above its 200-day MA.  Watch closely to see if this holds.5Figure 4 – Ticker SLV  (Courtesy: ProfitSource by HUBB

Gold Stocks

Gold stocks (using ETF ticker GDX) may have already reversed to bullish (see Elliott Wave count in Figure 5).  In the short run beware of potential seasonal weakness between now and late October4Figure 5 – Gold stocks (Ticker GDX)  (Courtesy: ProfitSource by HUBB

Jay Kaeppel

Tracking Gold With an “Anti-Gold” Index

In this piece I will detail an index that I created that I use in an effort to designate the trend of gold as either “bullish” or “bearish.”  But first some important notes:

(See also Fighting the Urge to Jump Into Gold Stocks…For Now)

I will say unabashedly that at first glance the results look pretty darn good.  That’s the good news.  The bad news is that there are a few caveats:

1. Because some of the components of the index only started trading in 2008, it has a very short history.

2. The components of the index became components of the index based primarily on their very low or inverse correlation to the price of gold.  It should be noted for the record that correlations between and among varying asserts can and do (and probably will) change over time.

So the bottom line is that the index that I will detail next may be useful as a tool to help confirm or deny a given trend in the price of gold.  But in no way does it serve as a “magic bullet.”

Jay’s Anti-Gold Index

I used AIQ TradingExpert to create a “Group” (although I heretofore will refer to it as an “index”) comprised of the following components:

Ticker GLL – ProShares UltraShort Short Gold ETF

Ticker RYSDX – Rydex Strengthening U.S. Dollar fund

Ticker SPX – S&P 500 Index

Ticker YCS – ProShares UltraShort Japanese Yen ETF

Each trading day the “Group” is updated by adding or subtracting the average gain or loss for that day for the four components listed.

Figure 1 displays Jay’s Anti-Gold Index in the top clip and ticker GLD (an ETF that tracks the price of gold bullion) in the bottom clip.  As you can see, the two tend to move inversely to one another.1Figure 1 – Jay’s Anti-Gold Index versus Ticker GLD

To identify a trend I add a couple of moving average filters.  Unfortunately (at least for the purposes of this article) one of them is pretty “long winded” in terms of calculations.  So I will include the calculations at the end of the article.

*Moving Average #1 = 36-period front-weighted moving average (calculations detailed at end of article)

Moving Average #2 = 55-week exponential moving average

A 55-week exponential moving average is calculated as follows:

(Prior week moving average * 0.964286) + (This week’s close * 0.035714)

The moving averages above are plotted against Jay’s Anti-Gold Index at the end of each week.

*If Moving Average #1 < Moving Average #2 on the chart of Jay’s Anti-Gold Index then the trend for GLD is BULLISH

*If Moving Average #1 > Moving Average #2 on the chart of Jay’s Anti-Gold Index then the trend for GLD is BEARISH

In other words, when the trend for Jay’s Anti-Gold Index is bearish then the trend for GLD is considered to be bullish and vice versa.2Figure 2 – Jay’s Anti-Gold Index versus ticker GLD


Like I said at the outset, at first glance tracking this index appears to be a pretty good way to identify the trend for gold.  For the moment, the Anti-Gold Index remains in a bullish trend, so by that measure ticker GLD remains in a bearish trend.

But just remember that the track record is likely too short to allow us to draw any definite conclusions as to its long-term usefulness.  Likewise, while the inverse nature of GLD versus GLL is not going to change (since GLL is simply a leveraged inverse gold fund) and the inverse nature of the U.S. Dollar versus GLD is not likely to change, the relationship between gold and the S&P 500 does change over time and the relationship between gold and the Japanese Yen (YCS is a leveraged short Japanese Yen ETF) can also change going forward.

So I am keeping an eye on the trend of Jay’ Anti-Gold Index (still bullish) but won’t “bet the ranch” based on its performance one way or the other.  Still, while the speculator in me is desperate to try to “pick a bottom” in gold, the pragmatist in me looks at the current (up trending) status of my Anti-Gold Index and counsel’s those timeless words:

“Patience, um, analyst, patience.”

Jay Kaeppel

Calculations for 36-week Front Weighted Moving Average:

!!! Front Weighted 36 Day Moving Average is similar to all other moving averages.
!!! The interpretation is just like with all the others, the trend is up when prices are
!!! above the moving average and the trend is down when prices are below the
!!! moving average. This particular variation attempts to weight the data at the front more
!!! than that at the back, with a sliding scale for each trading days value.

Bar34 is val([close], 34) * 0.01.
Bar33 is val([close], 33) * 0.01.
Bar32 is val([close], 32) * 0.01.
Bar31 is val([close], 31) * 0.01.
Bar30 is val([close], 30) * 0.01.
Bar29 is val([close], 29) * 0.01.
Bar28 is val([close], 28) * 0.01.
Bar27 is val([close], 27) * 0.01.
Bar26 is val([close], 26) * 0.01.
Bar25 is val([close], 25) * 0.02.
Bar24 is val([close], 24) * 0.02.
Bar23 is val([close], 23) * 0.02.
Bar22 is val([close], 22) * 0.02.
Bar21 is val([close], 21) * 0.02.
Bar20 is val([close], 20) * 0.02.
Bar19 is val([close], 19) * 0.02.
Bar18 is val([close], 18) * 0.02.
Bar17 is val([close], 17) * 0.03.
Bar16 is val([close], 16) * 0.031.
Bar15 is val([close], 15) * 0.031.
Bar14 is val([close], 14) * 0.031.
Bar13 is val([close], 13) * 0.031.
Bar12 is val([close], 12) * 0.031.
Bar11 is val([close], 11) * 0.031.
Bar10 is val([close], 10) * 0.031.
Bar9 is val([close], 9) * 0.031.
Bar8 is val([close], 8) * 0.031.
Bar7 is val([close], 7) * 0.006.
Bar6 is val([close], 6) * 0.006.
Bar5 is val([close], 5) * 0.07.
Bar4 is val([close], 4) * 0.07.
Bar3 is val([close], 3) * 0.07.
Bar2 is val([close], 2) * 0.07.
Bar1 is val([close], 1) * 0.07.
Bar0 is [close] * 0.079.

OneFrontWeighted36BarMA1 is bar34 + bar33 + bar32 + bar31 + bar30 + bar29 + bar28 + bar27 + bar26 + bar25 +
bar24 + bar23 + bar22 + bar21 + bar20 + bar19 + bar18.

TwoFrontWeighted36BarMA2 is bar17 + bar16 + bar15 + bar14 + bar13 + bar12 + bar11+ bar10 + bar9 + bar8 +
bar7 + bar6 + bar5 + bar4 + bar3 + bar2.

ThreeFrontWeighted36BarMA3 is bar1 + bar0.

FrontWeighted36DayMA is OneFrontWeighted36BarMA1 + TwoFrontWeighted36BarMA2 +ThreeFrontWeighted36BarMA3.

Feel free to use something “easier” – but beware of potential whipsaws in sideways markets.  JK