Options Idea of the Week Options educational content provided courtesy of ChartBender.
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| Position Building, Week 2: The Framework | Last week, we began to construct our options-only position in SPY. It is illustrated below. However, as you can see, there is a lot of new detail being conveyed in the figure. The information shown is the framework that facilitates good decisions at appropriate times; it represents our key considerations when deploying capital.
Of the greatest importance is the bell curve to the left, within which price and volatility fluctuate. We are interested in how far both price and volatility deviate from their 50-week mean values. Anytime either is more than 2 standard deviations above or below the mean, we get very interested in making a move.
Principal: $10,000 | Position Value: $1,104 | Portfolio Value: $10,047*
 
Generally, when the underlying asset price is rising above its 50-week mean price, volatility is falling. The opposite is also the norm.
When the underlying rises more than 2 standard deviations above the 50-week mean, our bias becomes less bullish and more protective, though not necessarily bearish. When the underlying price falls more than 2 standard deviations below the 50-week average, we become very bullish, albeit tactically so.
Our aim is to maintain varying degrees of bullishness at all times, and to mitigate the damage during corrections by capitalizing on extreme oversold conditions. Watch over the coming weeks as we massage and construct this position. Remember, capital preservation is paramount as we attempt to grow these funds.
*The cash not yet invested is earning interest - it's not sitting in our hypothetical mattress.
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Until next time, trade well!
The ChartBender Team
ChartBender, LLC
www.ChartBender.com
support@chartbender.com
| | | This is not a solicitation or recommendation to buy any securities, options or financial instruments of any type. Any information in this email is for educational purposes only. |
This educational content is provided by ChartBender.
© 2005 ChartBender, LLC. |
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