Trading Options With CVR Signals, Part I
Trading Options With CVR Signals (Part II)
Last Thursday, March 11, we talked about trading CVR signals with options, especially CVR buy signals. These trades are particularly effective because when the signal is correct, you have the three main features of options working in your favor: time, price direction, and volatility.
A recent example to look at occurred last Thursday night when a CVR I buy signal triggered. At the time, the OEX was trading at 649.85. Using a two strike price out-of-the-money put allowed you to short the March 640 puts at 3 *. Over the next three trading days, as the signal played itself out and the OEX rose, the puts lost more than 70% of their value and traded to as low as 13/16. As mentioned earlier, you had the best of three worlds working in your favor: time (the erosion of three trading days), price (the index rose over five points), and an implied volatility drop.
One final note: Naked options have large risk exposure and should only be traded if you fully understand and can handle a substantial amount of risk. If you wish to lower the risk, buy further out of the money puts and create a spread.
Markets To Watch: June T-bonds [USM9>USM9] are still on the watch list, as are the brokerage stocks, especially Paine Webber [PWJ>PWJ].
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