Jun 14, 2010 - Issue #219
Condor Option Strategy
Condor Option Strategy attempts to capture the elevated time value premiums caused by high volatility.
The 'Condor' is a combined bullish Call spread and bearish Put spread.
CNBC's guest commentators are in agreement that Option volatility is "through the roof". This is no time to
be buying Puts for protection.
Well, if Options are too expensive to 'buy' then they must be a 'sell'.
You could sell 'naked' but then your risk is unlimited. The Options might not be 'expensive' enough. Another
'flash' crash would wipe you out.
The 'Condor' is 'neutral' (non-directional) in that the sole purpose is to put it on when volatility
is high and close it out when volatility collapses (often near expiration), thereby, 'capturing' the 'time' value.
It is the nature of Option 'pricing' that 'deep' in-the-money Options have less 'time value' than 'at-the-money'
Options which consist of nothing but pure 'time value'.
Buying a 'deep' in-the-money Call and a 'deep' in-the-money Put will always be worth, at least, the difference
between the strike prices. More if it moves beyond the strikes (a 30 Call and a 40 Put will always be worth 10
points, at a minimum).
Selling (Writing) a 36 Call and a 34 Put with the stock trading at 35 'captures' maximum 'air' or 'puff'.
If the Options suffer a volatility 'collapse', the position can be closed out early. If not, eventually, all
the 'time value' component of all the Options 'evaporates' to zero at expiration and the 'Condor' can be closed
at or near the 'intrinsic' value of the entire position.
One should always be aware of the shrinking remaining 'time value' of the 'short' Options in the position and
close out early to avoid 'exercise'.
Always use an Option Pricing Model before entering any Option position.
W. D. Gann, a keen market observer, although not an astronomer, nevertheless, was fascinated by the apparent
coincidence of important market 'pivot points' and astronomical dates. Theories exist for estimating time and
price of important market turning points but astronomical occurrences are computed with mathematical certainty.
There is no logical reason why these occurrences should coincide yet, empirically, they have.
The 'Full Moon' and 'New Moon', among others, have been cited. Therefore, one might be well advised to be aware
of their occurrence. Note: The first 5 business days of 2008 concluded on a 'New Moon' and we all know how that
worked out. Coincidence?
6/12 Saturday - New Moon (Observe market action Friday & Monday).
6/26 Saturday - Full Moon (Observe market action Friday & Monday).
During the next two weeks, the following DJ-30 components report earnings. Keep a sharp eye
out for possible price swings leading up to 'earnings day' (Subject to revision):
Dow score card for the week ending 6/11/10.
DJ-30: 10211.07 +279.10 +2.81%. The Real World (arithmetical) DJ-30: 45.04 +1.25 +2.85%.
UP: 26, Down: 4.
Trends (weekly charts): This is the subjective part.
Rising (Generally Higher Highs/Higher Lows) 1 (+1) 3%:
Consolidating (Generally Lower Highs/Higher Lows) 26 (N/C) 87%:
AA, AXP, BA, BAC, CAT, CVX, DD, DIS, +*HD, HPQ, IBM, +*JNJ, JPM, KFT, KO, MCD, +*MMM, MSFT, +*PFE, PG, T, TRV,
UTX, VZ, WMT, XOM.
Declining (Generally Lower Highs/Lower Lows) 3 (-1) 10%:
-*CSCO, -*GE, -*INTC.
+/- denotes change of direction.
* denotes change of category.
Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!