Option Index Update 05.04.12

By Christopher Ebert

The option indices remained mostly unchanged over the last week. As has been the case since early April, the options market is giving no clear signals of a trend in either direction. The CCNPI is often the quickest to react to a change in the market. Any changes will be reported here in future updates.

• The Long Straddle/Strangle Index (LSSI) which measures the justification of fear remains well within the normal limits of -5% to +5. The index is unchanged from a week ago and is an indication that implied volatility of at-the-money options continues to be a fairly accurate predictor of performance of the S&P 500.

• The Long Call/Married Put Index (LCMPI) which measures the strength of a bull market remains mixed. The 7-day and 28-day performance is now negative with only the 112-day term long calls or married puts holding in profitable territory. This suggests that the market is still showing strength, however the poor performance over the shorter terms does not verify that strength.

• The Covered Call/Naked Put Index (CCNPI) which measures bullishness or bearishness regardless of trend is also mixed. The premium on a covered call or naked put, expiring today, would have exceeded any losses on the underlying if it were opened 112 days ago. However the same trade opened 28 days or 7 days ago would have resulted in a loss. Such a scenario is often an indicator that the market is waiting for a catalyst, and is likely to remain range-bound in the meantime.

This is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book “Show Me Your Options“.