Option Trading Blog

The crazy roller coaster in the Israeli market and in the world markets made me very busy. The Israeli market was very volatile and exciting at the same time. A true trader thrives in these situations.

The public and press are always behind

A nice indicator I use, is what I call the crowed and press indicator. It is usually the case that if the public and press think a big decline is going to happen then it usually won’t happen and vice versa. The problem of course is to capture that sentiment. That is why I like to go to forums and see what is up with the people or get up to speed with all the financial press and analysts. It is not science but is gives me an idea. It was pretty funny to see that after the big decline that nobody had expected, the press was all over it saying that tomorrow there will be another big decline. This goes back to the black swan that people overestimate rare events after they happen and vice versa.

How it all went down

On the 25 of July, the market closed at 1166.63 which was a record high. The next day it went down to 1,137.12. A 2.5% decline. This set panic and caused the market to go down by 4% the next day. After that, there were talks about how the market would now crash and it was all expected. That is where you have to tell to yourself that the public is usually the last one to know anything about anything(including the financial press). For them, it was a big surprise that the market went up almost 3% in the next two days. After that, the roller coaster continued with ups and downs almost every day. Today the market closed at 1068 points. What is the lesson? Panic and Euphoria are good for traders.

Out-of-the-money options

I cannot go into specifics on how I exactly trade options, but I just want to say that the panic of the crowed could be exploited. Let’s just say that for some reason, the public always buys the deepest out-of-the-money puts in a decline.

Risk adjustments

I should make a bigger post on this one. Option traders use the delta to monitor their exposure in their position. The black and scholes delta could be way off than the real delta. A better way is to just observe the delta from the prices. This means seeing how much the price of an option changed relative to the change in the underlying. If you don’t fully understand what I mean don’t worry. I’ll make a bigger post on “discrete” greeks in the near future.

Final note

It has come to my knowledge that this blog was ranked in the Top 100 Day Trading Blogs. I am happy that people find what I write informative. That is on the top of my mind when I write each entry in here.

It has never been quiet in the political side. In the shadows of political investigation, among them fraud, of several top political figures such as the Minister of Treasury, Mr. Hirshenson, it seems that the stock market has become a different entity. I can see two possibilities for this. The first, is the total indifference investors place upon the influence this current government has on the financial markets. The second, which relates to the first, is that as I said in my previous weekend review, the Israeli market and the US markets are very correlated. Hence, the government has little influence on the performance. This can be seen in the Media when the financial reporters say something along the lines “The investors don’t care what happens in the country and keep investing” with a tone of anger because their lack of understanding.

The TA25 closed yesterday at 968.09, making a nice recovery from last week and a total weekly return of 1.69%! In my last weekend review, I had said that there is no room for panic, and that although the political situation is complex, the Israeli Stock Market has it’s own rhythm, sometimes behaving in its own world indifferent to local news. The investors don’t place too much meaning to the investigations as before, since they are getting more and more used to such news. It will take major breaking news to affect the stock market.

Here is the graph of the last trading week

 

As you can see, it didn’t look promising in the start of this week. You have to remember though that there was a lot of uncertainty regarding the strike (which ended quickly than speculated) and how it would affect the market. But like always, good things come to those who wait and the reward was soon to follow.

This week in a glance: I speculate that in the long run, the market is rising. No need to panic about noise such as political investigations that in the long run don’t affect the market. The problem is the US stock market. If crisis hits there, the Israeli Market would also be affected.