Finally, End of the Bear Market?
Has it finally happened? After all the pain of the last eighteen months are we finally out of the bear market?
It’s pretty close. After flirting with the bear threshold (20% above the low) for a while we technically closed over it on Friday. But only just. After an early rally, SPY closed 10 cents above the bear exit. Not terribly convincing, and unlike the Covid recession where SPY bounced back very quickly, this has been a slow, painful, grinding climb out.
The chart shows how close we are to the bear exit. It is always amazing to me how accurately indexes behave around important levels. I mean, how do they know? They are a composite of millions of trades on thousands of stocks, yet they somehow manage to behave with precision. You can see that this week SPY bounced off the bear exit on three days, and then closed on it on a fourth.
It will be interesting next week to see if there is enough momentum for it to keep going up or if it decides to take a breather and hang around, something like QQQ did on its exit. Let’s take a look.
You can see that QQQ first reached the bear exit in early February, then bounced off and went down for a bit. Then, in late March, it reached it again, but then hung around that level until mid May, when it finally started moving north definitively. Will SPY follow that pattern? Possibly. We’ll find out.
Let’s look at the chart for SPYG. You can see that it is following SPY almost exactly, so the comments above about SPY are relevant here.
So it should be an interesting week; lets hope that the pain is over and we have a nice new bull market to trade.
Reader Q & A
I think answering questions in the comments is proving to be a good way of doing it, because you get answers to your questions much more quickly. Even from Greece I have been managing to respond within a day or two. I am repeating some of them here as others may have the same queries:
Hey John, posting it here so that others can see the response as they are good questions.
Re time decay in the last 30 – 60 days yes, you are right about that being the time that decay really kicks in, but because we are buying options with less than 1% time value we have limited our losses on that front. Of course, there is nothing to stop you rolling earlier – it’s a good idea, just that I was trying to make the ITM strategy as quick and easy as possible, hence the idea of a once-a-year roll.
Re rolling every 6 months – yes, now that brokerage costs are negligible that is a good idea – as above, was just trying to keep the strategy as simple as possible.
Re optimal time to roll out in backtesting – I backtested with the rule that if the position was rolled with more than 90 days to expiry then the time value was not lost, but if there was less than 90 days then the entire time value was lost. So you can see that the backtest results are a worst-case scenario, the actual results would be better – as always I make sure that I am not cherry-picking the data or gilding the lily.
Good questions, hope this answers them.
Hi Charity, yes rolling out and up is a good idea. Today, SPY has closed at $427.92 So I would look for a strike between $215 and $240 (depending on your risk tolerance!) and an expiry date of January 2024 or later.
It’s so good to see SPY going up again!
(and thank you for your kind words)
Hi Charity – re backtesting and getting option prices – yes, this is well-nigh impossible because option pricing changes day to day and minute to minute. BUT if we are using a strike at, say, 50% of the current price then we know that there is very little time value and the option price plus the strike will be less than 1% above the current price. We can then use that to estimate the option price in the past.
So, for example, if SPY was trading at $400 and you wanted to know the price of the $200 strike option then you can use $404 (1% above current price of $400) minus the strike $200 so your option will cost $204.
Clearly, that overestimates the actual option price (as you can usually get it for less than 1% above current price at 50% leverage (i.e. strike at half price), so the bacltesting tends to underestimate profits, but that is good.
When backtesting, I assume that if I am selling an option with less than 90 days to expiry then it has lost all time value, so again this underestimates results.
I think 2? 3? posts ago I had a section on ‘How to do backtesting’ which may be helpful. Yes, found it, here it is: https://heathercullen.com/waves-or-tide/ – it is about backtsting SPYG alternatives but the principles are the same.
Hope this helps
Yes, if you want more than 50% leverage then move your strike up to $35. I see the Dec $35 ia $24.40 / $25.00 (bid / ask) so this may suit you. If you are going to roll up I would roll out as well – no particular reason, just that you will have more time on your side and wont have to roll so often.
Hope this helps.
Apology – I know the typography of the accordian layout above is pretty awful, but I can’t find the setting where I change it! Its on my list to fix, but if anyone knows Elementor enough to let me know that would be much appreciated!
Tom Hougaard isn’t back until the 12 June so no action on this front.
Summer of '23
I am currently in Greece. I started in Santorini, and while the scenery was absolutely beautiful, there were so many people and cars it all felt rushed rather than relaxing. After that I went to Amorgos, which was very quiet and more Greek somehow. I am now on an island called Folegandros, also very quiet and beautiful. This is the view from the pool – hard to take, I know!
I have to love the stock market for giving me the means to do this every year. No more winters, ever! I’m very lucky, I know. It was always my dream to be able to do this.
https://www.facebook.com/heather.cullen.756 If you want to see any more photos and follow where I go, I am posting photos almost every day on Facebook – Heather Cullen, not Heather Cullen Author which I am not updating.
I have so many What’s App private groups, and invitation only Facebook groups and family groups its too hard to keep track of them and remember where to post, so I have given up and am posting publicly on FB.
Let’s hope for a nice, bullish week so that we can get back to making some lovely profits!