Monday, March 13, 2006

Make 10% By Friday?

It's a lucrative proposition. How can it be done?

Last night I wrote about the bearish divergence between the Dow Jones and the Nasdaq. What I did not mention (those who care would see it as obvious) that S&P 100 and the Nasdaq have that same divergence, which leads me to believe the following two things:
  1. Most like the markets will fall into a bear trend for the foreseeable future.
  2. S&P 100 won't break out to a multi-year high without the Nasdaq's help. And even if I am wrong and it does, it won't stay there.
Now, S&P 100 is trading at 585.29 as of this writing with the 590 strike marking that new multi-year high. So, we sell the 590 and buy the 595 for a net credit of $75 per spread. Given the margin outlay of $500 per contract, we rake in 15%. This assumes that we get filled at mid-market. However, even if we hit the bid and the offer, we still take in $65.

So, it's actually better than 10%, but when we make that much on our money in four days, let's not split hairs. :)

What are the odds on this?

I can't quantify them in a solid number but I do feel they are in the 9o's. The obvious question would be "how often does the S&P make a new high without the Nasdaq's support"? While this is a legitimate question it isn't that interesting. A more enlightening question would be, "how often does the S&P make a significant move (given it's realized volatility) during the expiration week and remain near the attained levels?" The reason I think this question is better is due to many idiosyncratic factors that come into play during expiration. Strike pinning would be one of them.

I'll look for the answers. In the meantime, I am putting our fund's money to work.



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