Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
CM Strategy

Optionalysis: MA20 Reverses, But Watch Out For Holidays and Expiry

CapM Premium Header

[level-capmind-pro]

It might be time to set up money to buy those call options again, as the MA20, our Capital Mind Premium indicator, seems to reverse.

Note: Also check the strategy right at the end. It builds a few “what-ifs” that should shape the way to work through the short term.

Option trading is risky. If you’re not someone who watches and trades the markets often, the rest of this post is useless. 

To recap: The MA20 is built by taking the number of Nifty stocks that are above the 20 day moving averages, and subtracting from it the number of stocks that are below. This resulting number (smoothed out) oscillates from -50 to +50. At Capital Mind we look at “trigger” points – above +30 and below -30. The return from those numbers back into “normal” territory is usually an indicator that things are going to to move.

 

MA20

We have seen success with this indicator, though it’s not been accurate in 2014. This time we got a decent return on our put options (bought when the MA20 fell from the +30 levels). 

Is it time to buy calls yet? The indicator says yes, but remember:

• Tomorrow is expiry day, and Thursday is a holiday. Then we have Friday and the weekend. Given options lose time value in the weekend, the timing will be important. A better position may be to buy February call options which will lose less in terms of time value. 

• The market’s been choppy and volatile but the implied volatility on options is very low (just 15 on the VIX). That means the market is not pricing in high volatility, which seems to already be here. This also means that if the market remains as irrational, the gains on your option position will be lower. (VIX tends to fall when markets move up)

Things to fear are that FIIs continue to be sellers, now for 11 days in a row!

 

 

 

 

 

 

 

 

 

image_thumb.png

 

And tomorrow, the expiry day, we are likely to see moves that seem to have halters in place, given the call and put open interest. The barriers are between 8200 and 8300 (where the Nifty currently is), and there is also heavy interest at 8000. Our expectation is that the Nifty may move a little bit down and end somewhere below 8200 for this expiry. 

 

 

PCR

Having said that the only thing that matters is: How do you trade the possibilities?

The Strategy

• Since the MA20 indicator is going long, a positive close tomorrow (>8300) could indicate a move back up; so either a Feb 2015 call option (8300 or such) might be the right position.

• If the market falls below , the indicator could have slipped back down below -30, so a purchase will have to wait till Friday.

• A flat close gives no comfort, so it’s wait and watch.

Sometimes the right answer is “do nothing”. And there’s nothing wrong with that answer. Too many times, we itch to act when we shouldn’t! 

Disclosure: We still own some Jan put options which we will have to get rid off at a small loss tomorrow (bought at 93, current price of 90)

 

 

divider

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

 

Capital Mind for ZD

[/level-capmind-pro]