$SPY – Probable forecast and and how to capitalize with double digit returns over the next 12 weeks with options
F-Shift Forecaster SPY 12 WEEK forecast
http://www.screencast.com/t/NzYxZGFmZjEt (Click to enlarge)
Using the F-Shift Forecaster, I wanted to get an idea – a PROBABLE idea as to where we are headed in the overall market. I downloaded WEEKLY historical data courtesy of Yahoo Finance and populated the forecaster to produce an unbiased probable outcome 12 weeks from today. Its easy to say “higher” given the current rally we are in but I needed something more specific than that to hang my hat on. The results are are probably going to make you re-think any opinions you may have. I know I did although even though I did and still DO have an opinion on the market – I trade only what I see and NOT what I believe.
F- Shift Forecaster - The Breakdown
http://www.screencast.com/t/N2Y5MDg5 (Click to enlarge)
Lets drill down into the “break down” seen in the 2nd screen shot above. As the pic. says, there is both the numeric value and the graphic representation for you to analyze. Personally I believe a picture tells the story a whole lot better so lets turn to the graphs.
The 1st thing that jumps right out at me is the distribution of probable outcomes. There are 4 possible outcomes and they are as follows;
1) Greater than (>) 10% from today’s start value
2) Between 0-10% from today’s start value
3) Between 0-(-10%) from today’s start value
4) Less than (<)-10% from today’s start value
^
The 1st pair of columns – both black and grey – show us the probability of a value exceeding 10% from today’s start value which by the way is 111.34 as of yesterdays close November 17,2009. There is a 34.5% weighted probability of that happening while under the non-weighted forecast there is only a 28.10% chance of occurrence. This is a difference of 22.78% between the weighted and non-weighted probability of occurrence - certainly noteworthy.
^
The 2nd pair of columns reflect the probability of the SPY’s finishing between 0-10%. Here discrepancy is much tighter with the NON – weighted outcome having the edge with 20.70% of occurrence relative to its weighted outcome counterpart which reads 18.20%. A difference of -12.08% from the weighted to the NON- weighted.
^
The 3rd pair of columns reflect the probability of the SPY’s finishing between 0-(-10%). The readings are 22.10% probability of occurrence for the NON – weighted relative to 17.80% for the weighted. Again a percentile difference of -19.46% from weighted to NON – weighted.
^
Finally the 4th pair of columns reflect the probability of the SPY’s finishing not only positively, but ending with a value less than (<) 10% from the start value ( 111.34). The weighted results at 29.50% are almost identical to the NON-weighted results which came in at 29.10%. The percentile difference between the two probable outcomes was only 1.37% from weighted to the NON- weighted readings.
^
So what does all of this tell us? That the 12 week probable outcome is pretty evenly distributed with a bias to EITHER a large move higher (greater than 10% from today’s start value) or a rather large pullback of -10% or more from today’s start value. Armed with this knowledge of the probable outcomes, how can we devise a trading strategy that will capitalize on this outlook? Its called trading a double diagonal options strategy which offers a WIDE range for profit potential from three (3) separate metrics;
-
1) a rise in implied volatility levels from the current yearly lows
-
2) Theta or time decay
-
3) as mentioned above a WIDE price range allowing the UI (underlying Instrument - SPY’s) to move up,down or stay neutral
Look for part 2 of this 3 part series later today or tomorrow and I will walk you through a trade that may turn out to be the only once you would have to make in 2010 !
Fulcrum Shift Trading