Simple Trade

I did a very simple analysis last week. I came up with a simple trade that is successful 60% of the time. That is a good win percentage and probably can be improved with a little effort. It won’t work forever in this simple form, but while I am trading it, I will look for ways to improve it without overfitting as described in a previous post.

Looking at the S&P500 from 11th January 2008 to 20th February 2009, add up the number of up weeks, there were 17, and the number of down weeks, there were 26.  Interestingly, the average return for a positive week was 4.37% while the average loss was 4.77%  Not a big difference in the size of the return, about a 10% bigger loss than gain.  But there were a lot more losing weeks than winning weeks.

In fact, 60%  of the weeks were down weeks and 40% up weeks.

So last Tuesday, 3rd March, I sold some DIA calls.  (DIA is an exchange traded fund that holds the same stocks as the Dow Jones Industrial Average.) The next day the market was up, but at 3:30 it started to turn over so I sold a few SPY calls.  (SPY is an exchange traded fund  that holds the same stocks as the S&P500 index).

The idea is that I improve my odds by waiting for an up day and then selling the calls.  There hasn’t been more than one up day a week for a long time.   Also, the equity only put call ratio is in the middle of its range as is the VIX.  So it doesn’t look like there is going to be a bounce very soon.  These are the indicators I will look at to see if they improve the win percentage of the trade.

A week later, today, the trade is up 56%.  The Dow is 6.6% away from the strike I sold it at.  and the S&P is 6.5% away from its strike.  That would take a week and a half to make up if we had up weeks for the next two weeks at the average 4.3% pace.

It is still important to stay vigilant.

Good trading.

For more trades like this, get my free CD “7 Secrets to Make $1,000 Per Week Trading Options”.