The other way to use Twitter is as an up-to-the-minute sentiment gauge on whatever stock, index, or ETF you are following. You have a ready made sample of market opinion right there to listen to.

One way to do that is to join StockTwits and enter the tickers for the stocks that you want to follow, or the other twitterers that you want to follow.

Tweetdeck lets you organize the tweets coming into different batches so that you can separate your trading tweets from personal ones from sports tweets, for example.

For example, Bill Luby of VIXandMore, writes that he uses twitter to retweet interesting items that he has come across, announce new posts on his blog, and comment on the market in real time.

Dr. Brett Steenbarger, TwiiterTrader, gives market commentary as it is happening, watching different sectors of the market to gauge overall strength.

MW: I discuss iron condors more often than any other strategy in this blog.  Do you have
any comments specific to adjusting iron condors – perhaps deciding when to
adjust?  Or perhaps a favored method?

PB: As you know I was a big trader of Iron Condors for several
years when the VIX was in the 10 – 20 range and did them monthly with very good
success until Aug 2007 when the whole market volatility environment changed
dramatically.  When I did Iron Condors
exclusively from 2003 – 2007 I tried to make strike selections where adjusting
was not something I would have to consider often.  However, as you know markets will
occasionally make large moves and threaten the short strikes.  My experience has been that adjustments for
Iron Condors are quite limited and most either eat into your credit
significantly, or increase risk.

The only adjustment I really considered was based on time to
expiration. One common adjustment “regime”
I would use if the Put side was threatened, for example, was to close the put
spread and roll it down and close the calls and roll them down as well as long
as I still maintained a total net credit.
The goal was to simply give me more space in the time remaining for my
options to expire worthless or get to a point where I could close for a
profit. I only considered this though if
time to expiration was short. If there
was 4 weeks left to expiration then the adjustment would still leave me plenty
of time for the position to move against me while reducing my credit. However if there was 1-2 weeks and I felt the
market had a good chance of moving back away from my threatened strike then I
would do the adjustment to sort of buy me more cushion to wait out the
market.

If the market kept coming at me, I would have to accept the
loss and bail. I found in my experience
that you really only have one adjustment in an IC to give you some cushion, and
if market still will not cooperate then you get out and look for next
opportunity.

Thanks Phil. I enjoyed this conversation and am pleased to have you as my first interview. ]]> http://tradenakedoptions.com/2009/06/interview-with-philip-budwick/feed/ 0 http://tradenakedoptions.com/2009/06/tracking-a-summer-trade/ http://tradenakedoptions.com/2009/06/tracking-a-summer-trade/#comments Sat, 20 Jun 2009 12:02:31 +0000 gyatz http://tradenakedoptions.com/?p=684 Dr. Brett Steenbarger looks at SPX volume and daily range to set expectations for daily trades on TraderFeed. Volatility generally picks up after the Fourth of July, though volume usually stays low over the summer, so I don’t think that one should use volume as a proxy for volatility as Dr. Brett mentions here. You can use volatility directly.

Above we see the five-day average volume (top chart) for the S&P 500 Index (SPY) and the five-day average trading range (bottom chart). One theme stressed on this blog is the importance of trading volume, largely because of its correlation with volatility.

As stocks have moved higher since the March lows, volume has steadily declined and so has the average high-low trading range. Stocks now provide almost 1/3 the expected range as earlier in the year.

This is why I find it crucial to adjust profit targets for volatility. (Note: SPY profit targets are posted every morning before the market open via Twitter; follow here or check the last five tweets on the blog page). Without such adjustment, we inevitably expect too much out of a trade when volatility comes out of the market, leaving us open to frequent and frustrating reversals.
.

One of the areas I’ve spent a fair amount of time on is news-related sentiment.  How stocks react to overtly positive or negative news, and what impact that tends to have on the broader market, is a consistent source of good information.

The new blog Sentiment News by the good folks at RavenPack (don’t ask what it costs, it’s not priced for individuals) highlights a study by Macquarie Research highlighting stock performance surrounding positive and negative news.

Some highlights:

• Investors are more likely to react adversely to negative news sentiment than to react favorably to positive news sentiment.
• Negative news sentiment is a stronger leading indicator of future underperformance than positive sentiment is for future outperformance.
• Stocks tend to be underperforming prior to a negative news announcement.
• Stocks tend to rebound after about five days {after negative news}.
• There is no short-term reversal after positive news events.

All of these confirm what I’ve found as well, so they are useful rules of thumb if trading individual stocks or even sectors that are greatly impacted by bellwether stocks.

Source:

How Does The Market React To News?

News Sentiment, June 17, 2009

He knows his way around options and his blog has some interesting posts and discussions. Here he discusses diagonal backspreads as a way to profit from a market move. He wrote these at the end of March when the market was moving up. It is something to keep in mind if the market ever breaks out of its range and moves down (or up some more).

In Back Spreads Standard and Diagonal he talks about the risks of a credit spread. Say you sell XYZ June 90 and buy XYZ June 100 calls. If XYZ is trading at 92, you can do that for a credit. The risk is that XYZ finishes somewhere between 93, say, and 100 where the calls you sold are more expensive and the calls you bought, the 100s have no value.

In a backspread you sell 10 XYZ June 90s and buy 15 XYZ June 100s. Here you might be able to collect a small premium, which if XYZ goes the wrong way, down, would be your profit. If XYZ moves past 100 those five extra calls give you unlimited upside. Again, if XYZ finishes below 100 your long calls are worthless and your short calls could put you in the hole for $1,000 each.

In the next installment of our saga Back Spreads Standard and Diagonal II he takes as an example the Russell 2000, RUT, which was at 429 at the time. The diagonal constructed is sell 10 May 460 Calls @ 16.70 with a delta = – 363
and buy 16 June 500 Calls @ 11.70 with a delta – 369. So this is delta neutral initially.

This might help you to follow his discussion.

One way to look at this is as a calendar spread of -10 May 460 Calls/ +10 June 460 calls; and a backspread in June -10 June 460 calls / + 16 June 500 calls. We have just added and subtracted the 10 June 460 calls. The calendar spread does well if implied volatility increases and the June backspread does well if the stock rises rapidly to overcome the drag of time decay and decline of implied volatility which usually accompanies rising stock price.

You can triangulate the position the other way too. That is, it is equivalent to a May backspread -10 May 460 Calls / + 16 May 500 Calls and a calendar spread -16 May 500 Calls / +16 June 500 Calls. The backspread wants a move clear through 500 or not to reach 460 and the calendar spread wants an increase in implied volatility.

The last in the series Back Spreads Standard and Diagonal III shows the return graphs with the effect of changes in implied volatility. It doesn’t show the effect of time decay which would give a surface. Worth reading.

While I tend to shy away from talking too much about intraday moves in the VIX, today has been an unusual day in the VIX.

First, for most Fridays and particularly before long weekends, you should expect the VIX to be (a little more than 1.0%) lower than usual due to what I refer to as calendar reversion, when options are repriced with the assumption of lower volatility in advance of several non-trading days.

As I type this the VIX is almost flat, while all the major indices are in the green.

What is particularly interesting, however,

is how the VIX since about 1:00 p.m. ET. In the one minute intraday chart below, note the steady rise in the VIX over the course of the last hour or so, while the SPX has essentially moved sideways.

The action in the VIX could portend a rocky last hour or two or perhaps indicate that traders are becoming more concerned about holding long positions over the holiday weekend. Keep an eye on the VIX – and the weakness in real estate (IYR) and financials (XLF).

The peak in the chart at the start of the day corresponds to the low in the SPX. The market was at a loss around 10 AM today.

In fact, the market dropped 1% in the last half hour to end the day nearly flat.

Don’t Over Fit

Part of his comfort with the methodology, I believe,  comes from his testing. He has tested his trade back over many years and sees how it performs.  There is a danger to creating trading strategies by backtesting.   There is a need to” improve” the parameters of the trading method so that the trading results improve.  This is a trap.  If the method works, it should work over a range of parameters.  If the parameters need to be fine tuned, that is a sign that they have been over-fitted.  They may have worked in the past, but probably will not work in the future.

One way to be sure to avoid this bias is to create your trading method over  say the past five years, but take out six months of three of the years.   Then once you have a method that you like, test it on the three six month periods that you did not look at.  That way if you have over fitted the parameters, the trades in the test periods won’t do well.

Juan has kept his trade parameters very simple and consistent.  That is a good sign.

How Does The Trade Behave?

He also has a very clear idea of why his trade does what it does. In other words, what are the hidden factors in the trade. Does it have an underlying bullish bias? Does it need volatility to increase to be profitable? What does time decay do to the trade? Does it profit from sharp moves or suffer?

Another piece of the puzzle is the time frame of the trade.  Are you most comfortable closing out all your trades every day?  Or every Friday?  Or do you want your trades to work over a month or two?  How are you most comfortable?

These are all important elements in creating a successful trader.