Tips for Your Option Trading Arsenal
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Bernie Schaeffer Schaeffers Research.com |
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I usually use this space to comment on articles that catch my eye in the financial media. I'm always on the alert for suspect "conventional wisdom," because when the crowd heads off in one direction, my contrarian antennae become sensitive.
Twice, however, since the beginning of the year, I've had the pleasure of announcing the arrival of a new edition of our SENTIMENT magazine, and I'm once again proud to announce our third issue.
The new issue includes a feature, which I wrote along with Todd Salamone, Senior Vice President for Research, that describes how experienced traders can profit by trading options around events such as earnings reports. Senior Equities Analyst Richard Sparks and Senior Technical Strategist Ryan Detrick recorded an accompanying video that explores the same topic.
Another feature, The Long Vertical Cure, by SENTIMENT Editorial Director Kevin Lund, explores debit spreads, a conservative strategy that helps you finance the purchase of one option by selling a further out-of-the-money option. Todd and I also discuss this strategy in an accompanying video.
And there's more! Senior Equity Analyst Joe Hargett writes about fundamental and technical analysis, two of the three major components of Expectational Analysis®, in the second part of a three-part series about the contrarian methodology that guides our outlook at Schaeffer's Investment Research. Ryan, meanwhile, owns up to some early-career mistakes in a new feature we're calling Confessions of a Trader. Plus, you'll find all of our regular features, such as Idea Lab and Ask Bernie.
We're proud and excited about what we've been able to accomplish with our first three issues. Our goal was to provide you – reader, investor, option trader – with educational material and commentary that will help make your trading more profitable. As I reviewed our first several issues, I believe we've accomplished that goal.
In fact, looking back over the first issue, readers got a bonus. The spring issue's cover story – entitled Are We There Yet? – proved especially prescient. I attempted to arm readers with some new tools for gauging market bottoms. Specifically, we examined two indicators: the 10-month historical volatility of the S&P 500 Index (SPX), and the 14-month relative strength index (or RSI). Both appeared to indicate that the March low was indeed the low. I wrote:
"In 1988, as the market was basing off the October 1987 bottom, S&P 10-month historical volatility peaked at about 40%. At the March 2003 bottom, 10-month historical volatility peaked just north of 35%. And as I write this, we are at a modern record high 10-month historical volatility of almost 44%. I also find it very interesting that in July 2008, when many were calling for a market bottom, the S&P's 10-month historical volatility was barely above 20%. But an argument can now be made (even as the VIX has receded sharply from its October peak) that the market has demonstrated sufficiently extreme long-term historical volatility to be consistent with a major bottom...
"The second indicator is the 14-month relative strength index (or RSI), an indicator developed by the great technician J. Welles Wilder as a measure of the degree to which markets are overbought or oversold. The basic idea is to buy oversold markets and sell overbought markets. Using this indicator is an art rather than a science, and one of the difficulties is that bear markets can get more oversold than one might ever imagine and they can remain oversold for longer than one might ever imagine. And the more severe the bear market, the more oversold it is likely to become. But even with these caveats in mind, this market is pretty impressively oversold. The S&P's 14-month RSI bottomed at 43 in November 1987 and at 27 in September 2002, and on both of these occasions the market was at or near major long-term lows. Currently, the 14-month RSI for the S&P is just above 25, so one could characterize this market as being oversold to an extent that would be consistent with a major bottom."
And so it turned out to be. We hope the content you find in the new issue of SENTIMENT proves equally astute. Enjoy!
Bernie Schaeffer:
• Developed Expectational Analysis®, a proprietary, three-tiered method of options analysis combining technical and fundamental studies with the analysis of investor sentiment.
Publisher
• In 1981, Bernie launched the newsletter, Bernie Schaeffer’s Option Advisor. Serving as senior editor since inception, Bernie has led the Option Advisor to become the nation’s leading options newsletter. Features: market commentary, specific trade recommendations, and trading strategy.
• Launched SchaeffersResearch.com, in 1997. A four-time winner of Forbes “Best of the Web” award, the website has also received positive mention in Barron’s, AAII and The Wall Street Journal Guide to Online Investing - “An independent options site that is one of the best for providing primers for both novice and advanced investors.” Features tools, quotes, data, commentary, and education.
• 10 Days to Successful Options TradingSM – This multi-media home study program teaches options basics. Learn fundamental strategies with hands-on application exercises and examples.
Author
• The Option Advisor: Wealth-Building Techniques Using Equity and Index Options (1997)
• New Thinking in Technical Analysis: Trading Models from the Masters – The industry has viewed Bernie’s Expectational Analysis® methodology as a groundbreaking approach to trading. Proof of this came with the publication of this new book by Bloomberg Press. One of twelve authors, Bernie was honored to be chosen from hundreds of market analysts to explain his methodology.
• Writes a monthly options column for Bloomberg Personal Finance magazine.
• Multexinvestor.com regularly calls on Bernie to contribute to their “Analyst Corner.”
Awards and Recognition
• Three time winner of The Wall Street Journal stock picking contest.
• Ranks fifth among market timers tracked by Timer Digest for the past decade.
• Dick Davis Hall of Fame inductee for his bearish posture ahead of the 1987 crash.
• He is known for successfully maintaining a bullish market posture throughout the 1990s.
• The Market Technician’s Association (MTA) awarded Bernie “Best of the Best” in 1997 in the field of Sentiment/Psychological Analysis.
• Bernie is regularly featured on investment chats on Yahoo! Finance.
• Bernie’s views on the stock market and the economy are regularly quoted in The Wall Street Journal, The New York Times, BusinessWeek, Investor’s Business Daily, and USA Today.
• Both Barron’s and The New York Times have featured Bernie in “Question & Answer” interviews.
• Recognized as a CNBC “Market Maven.”
• Appears regularly on national financial broadcasts such as CNBC, CNN, Bloomberg Television, the Nightly Business Report, Wall Street Week with Fortune and Fox News. Also serves as a guest host on CNNfn.
• Frequently invited to speak at national investment conferences and seminars.
• Regularly sits on Options Industry Council panels around the country.
• One of 50 market strategists appearing in BusinessWeek’s 2001 market forecast.