Trading options for income: Debit spreads when IV is low

In our quest to understand trading options for income, we use credit spreads (selling Iron Condors) when IV (implied volatility) is high to generate consistent income. Does it make sense to use debit spreads (buying Iron Condors) when IV is low?

The Iron Condor is a defined risk non-directional strategy that is often employed for underlyings that have high IV (implied volatility) or high IV rank (greater than 50%). It is comprised of two vertical spreads: a Put spread and a Call spread.

A vertical spread is comprised of two options within the same option chain (Weekly or Monthly) which are bought and sold concurrently. To form a credit spread (which brings premium into your account), you sell one option with a strike that is closer to ATM (at the money), or closer the current price of the underlying, while buying an option with a strike that is further OTM (out of the money), or further away from the underlying’s current price. A short IC (Iron Condor) is comprised of two credit spreads.

Conversely, to form a debit spread (which takes money from your account), you buy one option with a strike that is closer to ATM while selling an option with a strike that is further OTM. A long IC is comprised of two debit spreads.

To determine if long ICs will work as a strategy when IV Rank is low (periods when IV is low for the underlying), Tasty Trade recently conducted a test from 2009 through May 2014 of five ETFs: SPY, GLD, EWW, TLT, and IWM.

The test criteria is as follows: open a long IC position on the first trading day of each month with approximately 45 DTE (days till expiration) if IV Rank is below 50 percent; each debit spread should be $2 wide; the long strike should be at 80 percent OTM; and hold the position through expiration.

The results: out of 241 trades, the win ratio is 32 percent with a P&L of -$1,742; a slightly better than the expected win ratio of 29 percent (0.58 / 2.00). Only two (GLD, EWW) of the five ETFs had a positive P&L (percent winners of 35 and 34 percent respectively); IWM had the worse P&L at -$1,020 (25 percent winners).

In conclusion, the strategy of long ICs during periods of low IV Rank does not work. In a previous article on short Strangles during low IV Rank the results were positive, indicating that short strategies (Strangles and ICs) offer better outcomes than its inverse: long strategies.

Weekly market recap: Record highs after ECB rate reductions

For the week ending June 7, 2014, the markets continued their advance helped by the expected rate reductions of the ECB (European Central Bank) and the Employment Situation reports. New record highs were set by the Dow and S&P.

The ECB lowered rates on Thursday, as expected, to improve the economy of the Eurozone and combat deflation. In addition, it will be increasing its purchases of packaged business loans. Included in the drop in rates is a negative rate for overnight deposits to the Central Bank by member banks; an action that has never been tried before. This means that member banks will now have to pay the ECB to hold their deposits; an action which should encourage the member banks to increase consumer and business loans. Unlike the U.S., the ECB has not yet implemented quantitative easing (the large-scale purchasing of bonds and other financial assets).

The Jobs Report and Unemployment Rate, released on Friday, indicates that the economy continues to improve which led the Dow and S&P to new record levels. All sectors, except the Healthcare sector, showed improvement led by the cyclical sectors. Nonfarm payrolls increased in May by 217,000 (216,000 private sector; 1,000 public sector); and the Unemployment Rate remained unchanged at 6.3 percent (6.4 percent expected).

On the earnings front, as earnings season ended, public sector companies led the way with prominent PSU stocks registering earnings growth of around 2 to 8 percent.

In The News

A class-action lawsuit has been filed against 13 exchanges over HFT (high frequency trading). The suit filed in U.S. District Court, charges that the exchanges have been selling “advance access” to market data through co-location services and private feeds. The exchanges listed in the suit include: NYSE, BATS, Nasdaq OMX, and CBOE.

Bank of America (BofA) could face over $12 billion to settle probes by the U.S. Justice Department and a number of states. The probes allege that the bank handled shoddy mortgages. BofA is the second largest U.S. bank facing multiple government probes related to ” underwriting, sale and securitization of residential mortgage bonds before the financial crisis.”

Next Week

A lot of economic data was released this week, including May readings of manufacturing and service PMIs. In addition, five central banks met with only the ECB lowering rates.

The focus next week in the U.S. will be on the consumer with Retail Sales and Consumer Sentiment. On the producer side we have the PPI-FD (producer price index-final demand).

Globally, the focus will be on industrial output and merchandise trade data. The Bank of Japan (BoJ) meets and it is expected to leave rates unchanged. China will release consumer and producer prices for May, retail sales, industrial production, and its merchandise trade balance.

With little economic news, we expect the markets to be choppy next week in a tight range. The data from China will come out on Monday and Friday and could add to the volatility. Expect small dips to be followed by buying; if the markets overextend to the upside, expect profit taking. Pundits are expecting the S&P to hit 2,000 by the end of this month.

Market Gauge

Year-to-date the markets are up: Dow 2.1%; S&P500 5.5%; Nasdaq 3.5%.

The Markets for the past week were: DJIA up 1.2%; S&P500 up 1.3%; Nasdaq COMP up 1.9%.

Commodities (ETFs) for the past week were: Gold (GLD) up 0.15%; Silver (SLV) up 1.11%; Oil (OIH) up 2.54%; Dollar (UUP) unchanged; 30-yr Bonds (TYX) rose 11 basis points to 3.44%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 10.73% due to the ECB and Employment Situation reports.

Weekly Review

To see the week in review, go to the Econoday calendar.

On Monday, with a strong revised ISM report, the Dow rose 0.2% to 16,743.

On Tuesday, despite a strong vehicle sales report, the Dow dropped fractionally to 16,722. Gold held at $1,245.

On Wednesday, with mixed economic news, the Dow rose fractionally to 16,737.

On Thursday, with a very positive Weekly Jobless Claims report and interest rate drop by the ECB, the Dow rose 0.6% to 16,836 (a new record).

On Friday, with the Jobs Report as expected and the Unemployment Rate remaining unchanged at 6.3%, the Dow rose 0.5% to 16,924 (another record high).

Next Week’s Calendar

To see what’s on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is light: on Monday – nothing; on Tuesday – JOLTS; on Wednesday –Weekly EIA Petroleum Status Report, Treasury Budget; on Thursday –Weekly Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories; and Friday – PPI-FD, Consumer Sentiment.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.

Walter Loeb: Why Sears is the dying dinosaur of the retail business

Sears Holding is losing customers at an alarming rate, which has had the impact of Sears earnings slipping badly and burning massive quantities of cash. Walter Loeb, a former senior retail analyst at Morgan Stanley for 16 years, is highly critical of the once-vaunted retailer, he wrote in a column today in Forbes. Not only does Loeb have credentials as a retail analyst, he had a 20-year career with such retailers as Macy’s, May Department Stores and Allied Stores.

“I have to shudder at what has happened at Sears over the years. It is the dying dinosaur of retailing,” said Loeb.

“But Sears once had enormous customer trust, admiration, and loyalty. Sears was known for its hardline products. Over the years, especially under current leadership, the company has ignored customer preferences. Management has no understanding of what the customer wants,” said Loeb which is evidenced by a recent earnings report which reported its most recent loss of $402 million, or $3.79 per share, for the period ended May 3.

In addition, Sears Holding is burning cash at an alarming rate. The reason, Loeb says, is that “Sears has ignored new trends, has reduced their staples and basics, and has relied on a flawed loyalty program in a flawed attempt to bring customers to the stores.”

That loyalty program is the “Shop Your Way” rewards program that Sears C.E.O. Eddie Lampert claims is the company savior. But Loeb isn’t buying it.

He is also critical of the damage done to the “exclusive” Sears brands. “The company has given up its exclusive control over core brands like Craftsman tools, Die Hard batteries and Kenmore appliances, by making these brands available through other retailing outlets. Important stores have been sold to satisfy investors and Lands’ End has been spun off eliminating an important source of future income needed to sustain Sears.”

Loeb acknowledges that retail is not easy. “I know a lot of people, but I have known very few who can execute on all these levels. A few who come to mind that have what it takes are Sam Walton, Stanley Marcus, Terry Lundgren, Mickey Drexler, Bernard Arnault, and the Nordstrom family. Sure, Sam Walton with his entrepreneurial style created a new path for his discount stores. But his vision and values are difficult to sustain after his death and several leadership changes.”

Loeb has praise for some retailers, singling out Mickey Drexler of J.Crew. “Of course, J. Crew’s Mickey Drexler is held in high regard since he understands how to merchandise to his focus customers. I feel Bernard Arnault has led a merchandising, marketing, and operational vision to create an international chain of luxury fashion brands under the LVMH banner that is understood worldwide. And Nordstrom management’s unique attention to service at all levels of their business has created a strong bond with customers.”

What is similar about Walton, Marcus, Lundgren, Drexler, Arnault, and Nordstrom is that they merchandise to their best customers.

Loeb concluded that on a long-term basis, relying too heavily on prices is going to fail for three reasons.

“One, the customers gets so used to sales she becomes unwilling to shop at any other time,” said Loeb. “Two, stores over-promote and ignore the fact that it is a fashion business that creates loyalty.”

And lastly, “Stores that rely on sales will fail – they cannot succeed in convincing customers of their true value proposition. If price remains the key point of differentiation, above merchandising, we will be faced with another round of store closings—and Sears will be leading once again.”

Sources:

Forbes – Why Sears Is The Dying Dinosaur Of Retailing

Market impact: Ukraine presidential election

Ukraine held its presidential election Sunday, May 25, and exit polls indicate that candy tycoon Petro Poroshenko was elected. The billionaire vowed “to bring peace to the Ukrainian land”, maintain strong ties to Europe, and mend relations with Russia.

Petro Poroshenko was the former foreign minister, and a major supporter of closer ties with Europe. He was the only tycoon who publicly supported the protestors in Kiev’s Independence Square. He faces a huge challenge to unite Ukraine, which is already in a deadly civil conflict with rebels that have declared a separatist republic.

In Eastern Ukraine, where pro-Russian separatists seized government buildings and the fighting with Ukraine soldiers was fierce, less than 20 percent of the polling stations were open “after gunmen intimidated locals by smashing ballot boxes”. Nationwide it is estimated that the turnout was 60 percent of 35.5 million eligible voters, of which Poroshenko received nearly 56 percent (out of 21 candidates).

In the interim, Russian President Vladimir Putin publicly stated that he will respect the results of Sunday’s election and work closely with the newly elected president. There have been no reports of any fighting between Ukraine soldiers and pro-Russian separatists since the election.

The White House praised the Ukraine government for carrying out the election despite the violence in East Ukraine with pro-Russian separatists. The U.S. and Germany had threatened increased sanctions against Russia if the election was disrupted.

Market Impact

It is too early to determine the impact of the Ukraine presidential election on the U.S. and European markets. In Asia, which just closed, all markets advanced except the Hang Seng.

At the close, the Asian markets are: Asia Dow up 0.65%; Nikkei 225 up 0.97%; Hang Seng down -0.03%; Shanghai up 0.17%; Sensex up 1.70%; Singapore up 0.09%.

The U.S. markets are closed Monday for Memorial Day. Trading will resume on Tuesday.

If the Markets move down on Tuesday, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.

Weekly market recap: Labor market home run

For the week ending May 2, 2014, the labor market blew past estimates in April when the Employment Situation reports were released Friday, beating estimates handily and raising the question that this may be a weather related rebound. And, the Fed released its FOMC meeting statement with no surprises, as $10 billion were evenly cut from Treasuries and mortgage-backed securities.

Growth in the labor market made headlines on both fronts: the Jobs Report listed 288,000 new nonfarm payroll jobs (273,000 private sector; 15,000 public sector) vs. an estimated 215,000; and the Unemployment Rate fell to 6.3 percent, which is well below the estimate of 6.6 percent. Clearly the labor market is improving; but to determine if this is simply a rebound from bad weather, the Fed will be looking more closely at next month’s reports. The low first quarter GDP figure of 0.1 percent growth is also blamed on bad weather.

There were no surprises from the Fed’s FOMC meeting statement as it continues its taper of $10 billion. “In sum, the recent economic data — labor markets, housing, manufacturing, etc… — have provided no reason for the Fed to stray from its course established earlier this year of gradually tapering bond purchases and offering assurances that interest rates will stay low and accommodative policies will remain in place just in case the numbers start to slip.” It is interesting to note that there were no dissents.

On the earnings front, hundreds of companies reported this past week with positive results. The standouts: Merck, Sprint, and Ameriprise Financial beat estimates.

In The News

The good news on Friday was offset by escalating violence in southern Ukraine. The crisis reached a new peak as Ukrainian security forces “launched their most intensive effort yet to try to dislodge pro-Russian separatists, who have reportedly seized a number of government buildings in nearly a dozen cities and towns.” Reports indicate deadly street fighting, downed Ukrainian government helicopters, and 31 people dead from a fire started at a trade union building.

A U.S. jury on Friday ordered Samsung Electronics to pay Apple $119.6 million. This figure is far less than Apple was seeking in their mobile patent litigation, which has been ongoing for three years. “Though this verdict is large by normal standards, it is hard to view this outcome as much of a victory for Apple. This amount is less than 10 percent of the amount Apple requested, and probably doesn’t surpass by too much the amount Apple spent litigating this case.”

Next Week

After a very poor first quarter, recent monthly economic data show a stronger second quarter ahead. Both manufacturing and housing continue to improve.

The focus next week in the U.S. will be on the non-manufacturing side with reports from Markit and ISM. And the Fed will be watching labor market data from the JOLTS report including job openings, hires, and separations.

Globally, the Reserve Bank of Australia, the Bank of England, and the European Central Bank will be releasing their monetary policies. Composite PMIs for April along with merchandise trade and industrial production data will be released.

We are expecting volatility spikes to continue next week as the situation in the Ukraine unfolds. As the Ukrainian presidential elections near, we are expecting the Ukraine crisis to worsen, possibly initiating a big adjustment in the markets.

Market Gauge

Year-to-date the markets are mixed: Dow -0.4%; S&P500 +1.8%; Nasdaq -1.3%.

The Markets for the past week were: DJIA up 0.9%; S&P500 up 1.0%; Nasdaq COMP up 1.2%.

Commodities (ETFs) for the past week were: Gold (GLD) down -0.29%; Silver (SLV) down -1.32%; Oil (OIH) down -0.42%; Dollar (UUP) down -0.33%; 30-yr Bonds (TYX) dropped 8 basis points to 3.37%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 12.91% due to positive earnings and excellent labor market reports.

Top Headlines

To view details of headlines, go online to CNBC.

In the U.S.: Hiring rebounds but more gave up looking; Payrolls jump in April as thaw hits; What’s the real unemployment rate?; Factory orders fall short of forecasts; What millennials don’t know about the job market; Buckle up! Economists turn negative on GDP growth; Treasury official: College should be cheaper; US 1% captures greatest slice of income pie: OECD; US jobless claims jump—but so do spending, income; US manufacturing extends winning streak; Planned layoffs jump in April: Challenger; Why the US is losing leverage with Russia; Yellen: Small bank loan growth a good sign; Fed tapers another $10 billion despite slow growth; Yikes! US economy crawls in first quarter; Disappointing growth could boost Fed’s dovish tones; US works to curb tax-driven business moves abroad; A blow for Obama on minimum wage hike; Midwest business index hits highest since October; US private job creation booms in April: ADP; China to overtake US economy; India trumps Japan; Why the slowdown in US economy may be temporary; Fed taper to cause ‘severe recession’: Economist; and Homeownership falls to 19-year low.

In Europe: Euro zone unemployment steady; RBS Q1 profit trebles to £1.6 billion; Pfizer offer ‘inadequate’: AstraZeneca; Last mango in Paris? EU bans imports; Pro-Russian rebels say Ukraine tries to retake town; Ukraine PM warns of ‘most dangerous 10 days’; Big Oil dollars flow into Ukraine, despite conflict; Wanna be in my gang: Is EU membership worth it?; Turkish police fire tear gas in May Day protests; Clothing group FatFace seeks $743M London listing; UK’s Morrisons cuts more prices to combat discounters; Is this the most boring ad ever made?; Lloyds posts profit increase, sets TSB float date; IMF warns Ukraine on bailout if it loses east; Is sterling punching above its weight?; Portugal to exit massive bailout without backstop; Dolce & Gabbana sentenced to 18 months in jail; GE’s Immelt: Alstom deal makes us $60B player here; Euro zone inflation rises, pressure remains on ECB; IMF slashes Russia forecast, warns of outflows; Ukraine’s east slipping from government’s grasp; Rare Jewish scripture sells for record $3.8M; BNP Paribas profit beats, warns of legal charges; and Co-op Bank review: Downfall due to Britannia takeover.

In Asia: Japan’s jobs market is getting tighter; Are Hirai’s days as Sony CEO numbered?; Last mango in Paris? EU bans imports; Lippo founder: US property looks attractive; Report on missing Malaysia plane reveals confusion; Sony drops to 6-week low after cutting guidance; Why Nike might move production out of China; Japan household spending jumps, jobs market improves; Shanghai Tang founder: I’m a ‘tyrant’ who gets things done; Why Alibaba probably won’t take the US by storm; China overtaking the US economy, but hold on …; Fake Viagra? Inside North Korea’s growing economy; Sony slashes profit forecast by nearly 70%; Is April’s best-performing currency set for further gains?; China plans crackdown on iron ore import loans; China official PMI rises slightly to 50.4 in April; Three killed in China train station attack; Why Sony desperately needs to innovate; After longtime ban, Xbox One to go on sale in China; Singapore’s biggest bank beats profit expectations; HTC chief: Our big problem in smartphone war; Markets show growing unease over Abenomics; OCBC well positioned to cope with headwinds: CEO; and China to overtake US economy; India trumps Japan.

Weekly Review

To see the week in review, go to the Econoday calendar.

On Monday, despite escalating violence in Ukraine and with merger & acquisition talk between Pfizer and AstraZeneca, the Dow rose 0.5% to 16,448.

On Tuesday, with strong earnings from Merck and Sprint, the Dow rose 0.5% to 16,535.

On Wednesday, with no surprise from the FOMC and despite first quarter GDP at 0.1% (blamed on bad weather), the Dow rose fractionally to 16,580.

On Thursday, despite strong manufacturing and consumer sector reports, the Dow dropped fractionally to 16,558.

On Friday, with the escalating Ukraine crisis offsetting excellent labor market reports, the Dow dropped fractionally to 16,512. Gold rose $10 to $1,300.

Next Week’s Calendar

To see what’s on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is light: on Monday – ISM Non-Mfg Index; on Tuesday – International Trade; on Wednesday – Weekly EIA Petroleum Status Report, Productivity and Costs, Janet Yellen speaks; on Thursday – Weekly Jobless Claims, Janet Yellen speaks; and Friday – JOLTS.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.

For more information about options, see the ‘Suggested by the author’ links below.

To the Charts

The following ETFs (DIA, SPY, QQQ) provide a technical review of the Market (and are also excellent Option trading vehicles). Represented are the Dow Industrials (DIA), S&P500 (SPY), and Nasdaq 100 (QQQ).

The Charts for each include views for Monthly, Weekly (including Price Channels), and Daily (including monthly Pivot Points) with MACD and Stochastic indicators. The Pivots are: white for central pivot point; yellow for R1 and S1; magenta for R2 and S2; red for R3 and S3.

DIA

The Dow Industrials (DIA) closed up at 164.75. If the DIA drops, then the next level of support will be at 159.88 (weekly chart); the next level of major resistance is 166.06 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD positive and strengthening, and the Stochastic moving up at the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

SPY

The S&P500 (SPY) closed up at 188.06. If the SPY drops, then the next level of support will be at 181.31 (weekly chart); the next level of major resistance is 189.70 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD positive and strengthening, and the Stochastic moving up below the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

QQQ

The Nasdaq 100 (QQQ) closed up at 87.49. If the QQQ drops, then the next level of support will be at 83.28 (weekly chart); the next level of major resistance is 91.36 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD negative but strengthening, and the Stochastic moving up above the oversold area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up at the overbought area.

Dow, S&P closes at another record high; market awaits U.S. payroll report

This sounds like a broken record, but the Dow and the S&P 500 ended at a new record on Thursday, according to Reuters, after the European Central Bank (ECB) cut rates to record lows and the ECB promised to fight against deflation. The Dow Jones industrial average rose 98.58 points or 0.59 percent, to 16,836.11, the S&P 500 gained 12.58 points or 0.65 percent, to 1,940.46 and the Nasdaq Composite added 44.59 points or 1.05 percent, to 4,296.23.
More Photos
View all 7 photos

Reuters pointed out that with “Thursday’s advance, the S&P has risen in nine of the past 11 sessions, up 3.6 percent over that period, and ended at a record high five times in the past six sessions.”

This is a continuation of the “Obama Stock Market,” as the Dow and the S&P 500 have continued on its meteoric rise. On President Obama’s first inauguration day on Jan. 20, 2009, the DJIA was sitting at 7,949.09. It then bottomed on March 9, 2009 at 6,547.05, which at the time was its lowest level since 1997.

The market could keep its upward spiral today, as investors are now await Friday’s U.S. payrolls report for May from the Department of Labor’s Bureau of Statistics. There is no doubt that once again job growth will be positive, but the question remains just how positive. Some are expecting slowed job growth for May and for the unemployment rate ticked up.

The number of Americans filing new claims for unemployment benefits rose slightly last week, but the trend there has been down, hovering around the 300,000 per week on jobless claims. “The number of data we got this week so far on the labor market have not provided a clear direction for tomorrow’s numbers,” said Randy Frederick, managing director of trading and derivatives with the Schwab Center for Financial Research in Austin. “So I wouldn’t be surprised if the market sold on the (payrolls) news tomorrow, but it’s likely to just be a knee-jerk reaction.”

Aside from the ECB news, there was other market news that impacted the continuing rally. Amazon.com Inc. is teasing with a next big thing on June 18, an expected “launch event” in Seattle to be hosted by CEO Jeff Bezos. That stock jumped 5.5 percent to $323.57.

Sprint has agreed to pay about $40 per share to buy T-Mobile US. Rite Aid shares slid 7.4 percent to $7.87 after it estimated first-quarter profit much below expectations. Ciena Corp shares jumped 18.4 percent to $22.48 after the company posted earnings that beat expectations and gave a revenue outlook above forecasts.

Also, on Wednesday, UnitedHealth announced a massive 34% dividend increase. The new dividend is payable on June 25th with an ex-dividend date of June 12. The new annual dividend of $1.50/share gives the stock a current yield of almost 1.90%, up from the 1.67% in 2012 when the stock was added to the Dow 30, according to Seeking Alpha.

But most important this morning, the payroll report which will be released 8:30 EST.

Reuters – Dow, S&P close at new records; payrolls in focus

Weekly market recap: Markets continue to rise

For the week ending May 24, 2014, the markets made strong gains with the S&P500 posting another record high and closing above 1900 for the first time. Economic news was mostly positive, especially for Housing and Manufacturing.

Both Existing Home Sales and New Home Sales showed marked improvement, meeting and beating expectations respectively. Still, after 5 years into the recovery, real estate sales have not reached historic averages and are still below last year’s pace (due partly to bad weather).

The PMI Manufacturing Index Flash is also up markedly, confirming the regional manufacturing reports from New York and Philadelphia. This counters the surprising decline in the manufacturing component of the Industrial Production report the prior week.

On the earnings front, as earnings season comes to a close, worse-than-expected results were posted by Staples and Urban Outfitters.

In The News

Apple sets a 52-week high on acquisition talks with Beats, which makes high-end headphones. The deal is for $3.2 billion, although there has been no announcement to date.

The conflict between Ukrainian troops and pro-Russian militants has escalate with just days before the May 25 presidential election. At least 32 people were killed in the Luhansk region.

Next Week

The economy continues to improve with expectations that economic growth will continue through the rest of the year.

The focus next week in the U.S. will be on the following: Durable Goods Orders and S&P Case-Shiller HPI on Tuesday; GDP and Pending Home Sales on Thursday; and Personal Income and Outlays on Friday.

Globally, with the increase in flash PMIs being offset by political uncertainty in Thailand and Ukraine, focus will be on the EU parliamentary elections on May 25 and consumer spending data.

We are expecting the markets to continue to improve next week if the election outcome in the Ukraine does not lead to further chaos and civil war. There is a moderate amount of economic data being reported, but no surprises are anticipated. Expect to see a rise in volatility if geopolitical concerns escalate.

Market Gauge

Year-to-date the markets are up: Dow 0.2%; S&P500 2.8%; Nasdaq 0.2%.

The Markets for the past week were: DJIA up 0.7%; S&P500 up 1.2%; Nasdaq COMP up 2.3%.

Commodities (ETFs) for the past week were: Gold (GLD) up 0.01%; Silver (SLV) up 0.27%; Oil (OIH) up 1.80%; Dollar (UUP) up 0.42%; 30-yr Bonds (TYX) rose 6 basis points to 3.40%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 11.36% due to improved economic news.

Weekly Review

To see the week in review, go to the Econoday calendar.

On Monday, with little news, the Dow rose fractionally to 16,511.

On Tuesday, with hawkish comments from Philly Fed President Plosser and disappointing earnings announcements from Staples and TJX, the Dow dropped -0.8% to 16,374.

On Wednesday, with dovish statements from the FOMC and bargain hunting, the Dow rose 1.0% to 16,533.

On Thursday, with mixed economic news and a narrow range bound day, the Dow rose fractionally to 16,543.

On Friday, with a big jump in New Home Sales, the Dow rose 0.4% to 16,606.

Next Week’s Calendar

To see what’s on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is full: on Monday – closed for Memorial Day; on Tuesday – Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence, Dallas Fed Mfg Survey; on Wednesday – nothing; on Thursday – Weekly EIA Petroleum Status Report, Weekly Jobless Claims, Pending Home Sales, FedSpeak; and Friday – Personal Income and Outlays, Chicago PMI, Consumer Sentiment, FedSpeak.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.

For more information about options, see the ‘Suggested by the author’ links below.

To the Charts

The following ETFs (DIA, SPY, QQQ) provide a technical review of the Market (and are also excellent Option trading vehicles). Represented are the Dow Industrials (DIA), S&P500 (SPY), and Nasdaq 100 (QQQ).

The Charts for each include views for Monthly, Weekly (including Price Channels), and Daily (including monthly Pivot Points) with MACD and Stochastic indicators. The Pivots are: white for central pivot point; yellow for R1 and S1; magenta for R2 and S2; red for R3 and S3.

DIA

The Dow Industrials (DIA) closed up at 165.83. If the DIA drops, then the next level of support will be at 159.88 (weekly chart); the next level of major resistance is 167.29 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD just positive, and the Stochastic moving up toward the midpoint.

SPY

The S&P500 (SPY) closed up at 190.35. If the SPY drops, then the next level of support will be at 181.31 (weekly chart); the next level of major resistance is 190.42 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up toward the overbought area.

QQQ

The Nasdaq 100 (QQQ) closed up at 89.88. If the QQQ drops, then the next level of support will be at 83.28 (weekly chart); the next level of major resistance is 91.06 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up at the midpoint.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

Climate Change Debate: Science versus Cult

Climate change deniers are steadfast in their belief that the scientific community is wrong about global warming due to human activities, but offer no empirical evidence to the contrary, only opinion based on a belief system that is unassailable. Having made up their minds before any debate cannot assail their position with facts. They can advance a doubt on an affirmative proposition and that is that. Case close.

Having an opinion based on a fundamental belief is having an accepted truth and reality not worthy of a debate because such opinion is not open to change. This is the definition of a cult, a group of very devoted believers outside the mainstream of critical thinking. The scientific community is almost unanimous about the threat of climate change. A cult would choose to deny the ocean getting warmer yet would tend to believe in a story about a global flood that wiped out all of humanity and all living things except one family and animals in an ark. The human race should all look like the lone survivors of the great flood but the clear evidence of widespread human and animal diversity will not dissuade devoted believers.

A cult could also be based on a political covenant where acceptance of climate change amounts to mortal sin, a transgression against the high power it is dependent on for political and economic support. Arguing against a faith-based position is futile.

Science has made giant strides to improve the fortune of the planet and inhabitants, but it has not always been correct and sometimes places lives in jeopardy. Perhaps an “act of god” could reverse the dire scientific prediction of climate change but why take the gamble? Present generation owes future generations to leave a better place. Start the debate on solutions.

Weekly market recap: Markets advance on low volume

For the week ending May 31, 2014, the markets advanced during the short 4-day week (markets closed on Monday for Memorial Day) with the S&P500 again making new highs on low volume, and the Dow posting a new record close on Friday. The advance occurred despite a very poor GDP figure indicating a contraction in the economy for the first quarter.

For the month, both the S&P500 and Dow had the largest gains since February with each making new record highs. The S&P500 gained 2.1 percent for the month, closing at 1,923.57; the Dow gained 0.8 percent, closing at 16,717.17.

GDP dropped to -1 percent after a first quarter revision (down from initially +0.1 percent) following a fourth quarter 2.6 percent rise. This is the first negative number in GDP in 3 years. The largest portion of the drop, as much as 1.5 GDP points, is blamed on bad weather; the remainder is blamed on a decline in inventory investments (especially car dealerships), U.S. exports, and reductions in spending on government programs and housing.

On the earnings front, as earnings season comes to a close: Costco, missed estimates; Kors and Toll Brothers beat estimates, and HP hit estimates (although revenue missed).

In The News

U.S. warned China today to halt actions in Asia that are causing destabilization; specifically its actions asserting claims in the South China Sea. In response, China said it would not initiate aggressive action in that area unless provoked.

The situation in the Ukraine grows worse under President-elect Petro Poroshenko (the inauguration is scheduled for June 7). Acting Defense Minister Mykhilo Koval said Ukrainian forces will continue operations in East Ukraine, charging that Russia was conducting “special operations”. Poroshenko will be meeting with world leaders next week to garner support for military actions against the separatists.

Next Week

Despite the negative first quarter GDP figure, the markets believe that economic growth will continue through the rest of the year.

The focus next week in the U.S. will be on the following: ISM Mfg Index, International Trade, and the Employment Situation (Jobs Report and Unemployment Rate).

Globally, where the economic data in Europe disappointed, the focus will be on the ECB and its Monetary Policy Announcement. China will be reporting its PMI Manufacturing for May on June 2.

We are expecting increased volatility next week as there is an abundance of economic data being released; of key importance will be the Jobs Report and Unemployment Rate. If the turmoil in Ukraine leads to further Russian involvement, expect the markets to drop.

Market Gauge

Year-to-date the markets are up: Dow 0.8%; S&P500 4.1%; Nasdaq 1.6%.

The Markets for the past week were: DJIA up 0.7%; S&P500 up 1.2%; Nasdaq COMP up 1.4%.

Commodities (ETFs) for the past week were: Gold (GLD) down -3.28%; Silver (SLV) down -3.11%; Oil (OIH) up 1.86%; Dollar (UUP) down -0.05%; 30-yr Bonds (TYX) dropped 9 basis points to 3.31%.

The VIX this past week (a measure of market sentiment and volatility) rose to 11.40% due to uncertainty over economic growth.

Weekly Review

To see the week in review, go to the Econoday calendar.

On Monday, markets closed for Memorial Day.

On Tuesday, with a strong Durable Goods report, the Dow rose 0.4% to 16,675. Gold dropped $25 to $1,265.

On Wednesday, with little news, the Dow dropped -0.3% to 16,633.

On Thursday, despite a negative GDP (offset by a very positive Weekly Jobless Claims report), the Dow rose 0.4% to 16,698.

On Friday, despite soft economic news, the Dow rose fractionally to 16,717.

Next Week’s Calendar

To see what’s on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is full: on Monday – ISM Mfg Index, Construction Spending; on Tuesday – Motor Vehicle Sales; on Wednesday – ADP Employment Report, International Trade, Productivity and Costs, Weekly EIA Petroleum Status Report; on Thursday –Weekly Jobless Claims; and Friday – Employment Situation.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised.

For more information about options, see the ‘Suggested by the author’ links below.

To the Charts

The following ETFs (DIA, SPY, QQQ) provide a technical review of the Market (and are also excellent Option trading vehicles). Represented are the Dow Industrials (DIA), S&P500 (SPY), and Nasdaq 100 (QQQ).

The Charts for each include views for Monthly, Weekly (including Price Channels), and Daily (including monthly Pivot Points) with MACD and Stochastic indicators. The Pivots are: white for central pivot point; yellow for R1 and S1; magenta for R2 and S2; red for R3 and S3.

DIA

The Dow Industrials (DIA) closed up at 166.93. If the DIA drops, then the next level of support will be at 159.88 (weekly chart); the next level of major resistance is 167.29 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving down above the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up at the overbought area.

SPY

The S&P500 (SPY) closed up at 192.68. If the SPY drops, then the next level of support will be at 181.31 (weekly chart); the next level of major resistance is 192.68 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the overbought area.

QQQ

The Nasdaq 100 (QQQ) closed up at 91.31. If the QQQ drops, then the next level of support will be at 83.28 (weekly chart); the next level of major resistance is 91.31 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving down above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving up above the midpoint.

The daily chart indicates a bullish posture (up Arrow) with the MACD positive and strengthening, and the Stochastic moving down above the overbought area.

Trading options for income: Two earnings trades

In our quest to understand trading options for income, we often consider strategies specific to earnings season, when companies release their earnings reports. A bullish strategy (Sunnyside Up) is compared to a bearish strategy (Over Easy).

The bullish Sunnyside Up strategy consists of an ATM (at the money) Call debit spread (bull Call spread) and a 1 SD (standard deviation) OTM (out of the money) short Call (which finances the debit spread). The short Call should bring in enough premium to result in a net credit for the strategy. This is an undefined risk strategy requiring 3 options for a 1 lot (the Call debit spread plus the short Call).

An ATM debit spread consists of buying one ITM option (1 strike in) while selling one OTM option (1 strike out).

The bearish Over Easy strategy consists of an ATM Put debit spread (bear Put spread) and a 1 SD OTM short Put. The short Put should bring in enough premium to result in a net credit for the strategy. This is an undefined risk strategy requiring 3 options for a 1 lot (the Put debit spread plus the short Put).

Tasty Trade recently tested the two earnings strategies over 3 years using the following equities: AAPL, AMZN, CMG, GOOG, NFLX, and PCLN (total of 72 occurrences). The option chain closest to expiration was selected, and the OTM option chosen was the first resulting in a credit greater than the cost of the debit spread and greater than 84 percent OTM. The trade was closed the day after earnings announcement.

The results: the bullish Sunnyside Up strategy had a P&L of $7,642 (95% winners) while the bearish Over Easy P&L was -$3,419 (82% winners).

In conclusion, the Sunnyside Up strategy outperformed the Over Easy strategy despite being in a bull market; its P&L, average credit, and even the percent OTM of the naked option were better for the Sunnyside Up strategy. One consideration is that these are undefined risk strategies; hence the buying power reduction will be very high (for AAPL, typically 3x greater than a defined risk strategy using a $25 wide credit spread). In fact, on the last earnings play for AAPL (April 23, 2014), this strategy lost -$1,733.