14Sep11

An investor has asked if could apply the S&P strategy below to the OEX (S&P 100). Sure, because the technicals of these indexes are so closely linked. If you look at the 2-yr OEX chart below you will see support at 500 and resistance at 550 (+/-). So you might sell the October 550-570 call spread and at the same time sell the October 490-470 put spread. I chose October because I like the time decay characteristics.

This spread is know as the condor, and it's described in my book. Yesterday, with the OEX at 526.25, this spread was trading at 6.50 (calls) + 5.10 (puts) for a credit of 11.60. The fees you get from your broker will, of course, reduce the credit you receive from this spread.

You need to be aware that if at expiration, the market closes above 570 or below 470, then you loose 20 - 11.60 = 8.4. The risk/return of .72/1 is not spectacular, but the risk of the OEX breaking so deeply through its support/resistance levels is not that great, either. Anyway, you're not going to run this spread through expiration. Instead, you're looking to buy it back at 6 or 4, taking a few ticks out of it.You would also put in a stop loss order to pay 13 or 14 to buy it back.

So now you need to be the trader. The technicals are on your side, but what can go wrong with the fundamentals? What if Greece defaults? What if Merkel gets a a vote of no confidence? What if France's banks get downgraded? What if the FOMC decide on another round of QE? What if they say that they've done enough? Has the market discounted the bad news?

At this point, you need to talk to your financial adviser. Let me know how you get on.