JuneWk1 - GLD Market Summary

JuneWk1 - GLD Market Summary - Need I say more? The charts have spoken. Looking at the general trend if we can call it a trend, it looks like gold might see an end to its doldrums. Which is a good thing for physical gold buyers out there. From the looks of the ichimoku charts, it looks like gold might appreciate in the weeks to come, signalling that there might be a sell-off of the main stock market. The relationship here is directly opposite in a way.

So what does this mean for weekly options sellers like myself? Well, the simple story is, there is volatility in the market, and that just means business for people like me. It means the market would potentially be stressed and thus there will be premiums available for risk takers to come in to make a bit of money. Of course when I say risk-takers, I am referring to buyers of options. They are the ones that is taking all the risk, whereas the sellers of options usually take on the lesser risk.

This is simply because of the value of time decay in weekly options. The option premiums decay very quickly as the week approaches the end of the option life-cycle. Weekly options expire every Friday week at the close of market day. So if you're a seller, you are really hoping for the options to expire worthless.

A look at the daily chart using Bollinger Bands will show the movement of Gold last night (SG Time).

 As we can all see from the chart above that gold was a relatively flat movement after opening with a gap downwards. All thanks to the non-farm payrolls indicating good results for the stock market which drove the SPY (S&P 500) all the way up into the sky (See my next post).

Typically for me, I will usually look for a selling opportunity after midnight on Friday (SG Time). This is because the premiums tend to drop off even more quickly after that time. For my strategy, I am looking for a trade as opposed to waiting for the trade to come to me. It's kind of tedious as you will never know when is a good time to enter into the market or if your trade would ultimately be safe or result in a loss.

My approach is primarily to eye-ball the Bollinger Bands movements to see the movement of price. I am using Yahoo Finance as my guide as I think the interactive charts is sufficient for the strategy that I am implementing. Of course if I had a more sophisticated tool showing different Bollinger Bands on the same options, that would be fabulous, but I am lazy.

From the chart above, if I were to sell a Put Spread, I should ideally be selling at the intra-day low, unfortunately nobody would know when the intra-day low would happen especially when the day is still fairly active. So my rule of thumb is to only enter the market after midnight, because I know that is when premiums start to deteriorate at twice the speed that it normally would.

From midnight onwards, I am looking at new lows along the Bollinger Bands, and where I find them, I will sell a Put Spread. This is based on the following rationale:

1. There is already a huge gap down.
2. There might be a possibility of a recovery upwards.
3. It is unlikely to go down much further.
4. If the intra-day low has already occurred (typically) earlier (before midnight), then it is unlikely that it will try to find new lows towards the end of market day (assumption that volume and volatility would have tapered off). However, I heard that the most volatile periods is usually 15 minutes into the market day and 15 minutes before market closes as everyone tries to consolidate their positions.
5. I must have a buffer far enough from the intra-day low.
6. As a safety measure, I will place a Contingent Order on Price of option to close the entire trade usually 10 cents before the strike price. If I was going to lose the trade, I don't want to lose too much.

My strategy is a highly risky one because of the following reasons:

1. It requires my eye-balling of the market movements. Eye-balling is a very tiring strategy especially if it requires you to stay up all night to monitor the US market which is in the day-time. If you're american, then it is probably much easier for you to eye-ball the market.
2. The Bollinger Bands don't tell you where or when is the right time to enter into the market. You have to decide for yourself when it would be a good time to enter into the market. The criterion above is just a guide.
3. Typically it is risky because I usually go for the higher premium which is also very near the price itself. So there is very little buffer and for most traders, it is considered a "no-no". But because it is towards the end of market day, I think there is value in exploring that option.

Anyway, I said all that to say that I sold a trade last night. Didn't manage to sell one last week because it wasn't a good week to sell, and I was right. :)

I sold a Put Spread for Gld $132/133 at a premium of $0.08 with a Contingent Order on Price to close both legs of the trade should price be less than $133.10. Price at the close of market trading went to a low of $133.28. <-- very close! :) But in the end it expired worthless, and I netted an ROI of 5.95% for the week.