Whoa Nelly! Quite the ripper this week as September is off to a tremendously bullish start. Bears were caught leaning the wrong way this week and it seems as though the market has gone from oversold to overbought in the matter of days. I, for one, am looking forward to a break from the markets on Monday and will use that time to spend with my family and friends. Doing so allows me to gain a fresh perspective on the markets and has served me well in the past. Enjoy your break and the links below!

Email’s Dark Side: 10 Psychology Studies

What can bees teach regulators and investors?

Dollar signs switch on brain

Why Optimism Can Keep You Broke

8 Tips for Improving Your Memory

For those that have asked, the archived version of the trading psychology webinar I did recently is now available. You’ll have to register to view it and will more than likely receive some marketing material from Trade King. You can opt out of the emails at any time (I think I receive 1/month).

I’d appreciate any feedback you have for me regarding the topic covered and/or future subjects that hold your interest. Thanks again for all your support! Click on the image below to be taken to the webinar.

Wednesday is what I’m calling the “event” where the $SPY ripped higher and never looked back. Thursday brought about a nice follow-through day, albeit on lighter volume. I like to track volume and feel as though it holds merit in certain areas of my trading. However, if you are on the wrong side of a trade and hold it simply because of waning volume you are lying to yourself. Why? Does your equity draw down care that the volume was light? I think not.

Below is a chart of the SPY over the past two days and some interesting levels and comments.

1. The VPOC for the last two days is currently 108.20. This is the area of acceptance for both buyers and sellers since the event so it should hold as support.
2. The  VWAP (purple dashed line). This is the average price of a long since the event. Notice how the VWAP is above the VPOC and the 50 SMA (the 50-day simple moving average is the blue line).
3. The mid-point of the standard deviation channel since the event. The SPY managed to close above it which suggest, along with closing near the highs of the day, that traders weren’t nervous taking a long into the non-farm payrolls.
4. Finally the candle that really skews the event. Notice how there is very little volume here (on the profile) which suggests that not a lot of sentiment resides there. In other words, price could move right back through it very easily.

What will matter most to me tomorrow is how the market reacts to the jobs number and whether or not the trend for that day holds going into the close. I wouldn’t be surprised to see a dead market by 10:30. Have a good and long weekend!

Wednesday’s action caught some by surprise and perhaps a bit of short covering ensued as a result.  I track the $SPX in many areas and one metric is new daily highs. Here are the names of the components that printed a new daily high Wednesday. Some of the names below have decent looking charts.

• Ameren Corp ($AEE)
• CMS Energy Corp ($CMS)
• CenterPoint Energy Inc ($CNP)
• Chubb Corp ($CB)
• Health Care REIT Inc ($HCN)
• McDonald’s Corp ($MCD)
• NiSource Inc ($NI)
• Northeast Utilities ($NU)
• PG&E Corp ($PCG)
• Pepco Holdings Inc ($POM)
• Pinnacle West Capital Corp ($PNW)
• Progress Energy Inc ($PGN)
• Qwest Communications International Inc ($Q)
• Red Hat Inc ($RHT)
• Salesforce.com Inc ($CRM)
• Wisconsin Energy Corp ($WEC)

September is here and that means the kids are back in school, pennant races tighten up and football gets into full swing (except for Roethlisberger). September also brings the expectation that full market participation is back. Let’s hope so because the Summer was nice and boring (perfect for premium selling).

Still fresh in the minds of many is September of 2009 when the $SPY took  a 10.8% hit and many sold positions and liquidated soon thereafter. September also reminds us of how fragile life really is and that we should make every day count.

Below you can see a chart that represents the last 15 years of September’s performance with the average return being  -0.65% Yes, September is a mixed bag when it comes to trying to gauge the end result. Keeping an eye on volatility can lend some insight but there are no guarantees. Place your bets!

As a premium seller I couldn’t have scripted a better week for the $SPX. So much economic data that the market almost seems confused as to which way to go. September is probably one of my favorite months to write premium. However, October can be a different story (2009). Have a great weekend and enjoy the links!

Is failure a better teacher than success?

The Aiki trader

Self−Discipline: Why is it so Difficult?

Disincentivizing greed

The 10,000 hour rule has become a cliche

Is it better to trade alone or with others?

Wall Street Drug Use: Employees Giving Up Cocaine for Pot and Pills

What a difference a week makes. Last Friday (8/20) the $IWM had 18% of its components trading above the 4SMA while the $SPY had 15% and the $QQQQ had 25%. As of the close Friday (8/27) the Russell 200o shows 92%, S&P 500 came in with 88% and the Nasdaq placed with 83% of its components trading above the 4SMA.

If you look at the chart below you can see that since June the air above 90% has been rather thin. I’m not calling a top, but rather something to watch as a tell. Bullish activity would be signaled by an extended stay above the 90% range while bearish activity would show an abrupt drop (like 8/17).

Oftentimes traders tend to focus for long periods of time and thus they reach a level of attentional fatigue and the mind wanders. Trading mistakes are made when a buy to open should have been a sell to close and anger can set in. A simple Stroop Effect test provides insight into the cognitive effects that are experienced as a result of attentional fatigue. Try it out for yourself.

Directions: Click on the image below and it will open up into a larger image. Quickly say aloud what color you see in every word, NOT the word you read.

Take a break when you find yourself making mistakes or losing focus during the trading day. Get up, walk around the office or exercise in some capacity. The blood flow alone can do wonders for your mind. Remember, trading is a skills based business and if your mental game is off your skills will suffer.

August option expiry has come and gone and the $SPX made a lower low on the weekly chart. The daily chart shows the broader based S&P 500 finishing the week under all of it’s moving averages. Ugly week for the bulls and yet the bears didn’t take the ball and run with it either. The September cycle is setting up to be a real sleeper, at least for the first few weeks, perhaps things will pick up post Labor Day.

Don’t forget that this coming Tuesday I’m doing a free webinar with TradeKing. I believe the event will be recorded and they will also have a pdf of the slides to download. Have a great weekend!

The brain’s preparation center gets ‘juiced’ by the prospect of winning

Maslow’s pyramid gets a much needed renovation

Undercutting Our Creativity With Self-sabotaging Limits

The Psychology Of Loss Aversion (And How It Applies To Venture Capital)

Personal responsibility in an age of instant gratification

The internet: is it changing the way we think?

Six Causes of Online Disinhibition

So far I’ve outlined some historical ranges and gone through some technical analysis on the $SPX in an attempt to show how I approach the market. In this post I delve into the option chains to see what’s being offered and where I can sell premium that aligns with my analysis.

A few rules that I follow when deciding where to sell:

• I don’t want to own more than 10% of the open interest
• I’d like to take in a .50 or better credit for the spread
• I NEVER sell naked but always use protection in the form of a further out-of-the-money option…ALWAYS

In the image below I can see that the calls offer very little in the way of premium for out-of-the-money strikes. This is in line with the overall near-term trend of lower highs/lower lows seen in my technical analysis. I know through the historical analysis of range that I can write any of the calls in the red box and the odds (acceptable by me) are in my favor that they will expire worthless. This doesn’t mean I just jump in and start selling at the first strike but rather start looking there.

I can see from the put chain below that there is far more interest in the downside when looking at the premium being paid for out-of-the-money strikes. My analysis suggests that I can write any of the strikes that are outlined in the red box. However, I also look at the probability of touching and the probability of expiring worthless. I like the probability of touching to be under 20% and really prefer to sell around that level. The 950 put has a 20.84% probability of being touched during the September cycle and that is a good starting point.

My approach focuses on time decay (Theta erosion) and not so much on volatility or other greeks. However, that doesn’t mean I don’t look at them. I’ll pull up the historical/implied volatility chart and see what it suggests. In the chart below I can see that the 30-day HV has been on a steady decline since the June expiry. I also notice that the IV has recently seen a nice pop since crossing over HV. As a premium seller I like to see the elevated level of implied volatility as it means traders are willing to pay more premium for their options. Elevated levels of implied volatility are nice, but it also suggests that there is some pending event (real or imagined) that is more than likely causing the rise. Therefore, I need to have a handle on macro and geopolitical issues that can impact the market.

In all honesty my volatility skills are lacking and I’d be doing a disservice if I didn’t point you to one of my all-time favorite trading books. Many of you know Adam Warner and his book is what I’d consider THE book on volatility. It’s a very easy read and the knowledge I gained about when to sell is worth the cover price alone. As far as my macro skills are considered I’d rate them elementary at best. I don’t proclaim to be an expert about selling premium nor do I tout my macro skills. Instead, I subscribe to newsletters of those that do have a special skill for the areas I lack. My favorite macro newsletter is Dave Taggart’s “The Macro Trader“. He is very thorough in his analysis and has a respectable track record.

At this point I’d put a few feeler orders out for spreads that meet my criteria outlined above. I may sit and watch certain spreads during the day to see what the volume looks like or maybe an individual strike in order to leg into a spread. For the most part I focus on the $ 10 spread as that allows me to define my risk at a level I’m comfortable with. I’ll talk more about defining risk and managing the position in part 4.