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Wednesday, June 30, 2010

P&F Trend Indicator Simulation

-Last week, I recommended buying Jul 120/110 put spread on NFLX for $4.10, just on the basis that the P&F Trend Indicator changed from 1 to -1. Based on experience, I have utilized this indicator as a signal that the stock price is likely to move away from the price level at the time of the signal. On Jun 21, NFLX stock was around $118.77 at time of my post, and it is now $112.65 at this moment. That July 120/110 put spread is worth $5.55, or 35.4% return in one week. So, P&F Trend Indicator has been profitable in this instance.
-I decided to run another simulation separate from the Relative Value Simulation (that utilizes the Estimated Future Volatility Indicator to look for undervalued/overvalued options) I began yesterday .
-The new simulation based on P&F Trend Indicator is looking to: 1) gauge the reliability and profitability of the indicator towards either stock or options strategy purchasing either the at-the-money straddle/strangle or selling the at-the-money butterfly, 2) assess the possibility of utilizing the indicator as part of Dispersion strategy, wherein I purchase options of stocks that have changes in the P&F Trend Indicator, while simultaneously selling options on an index, in this case SPY.
-I have selected 7 stocks to observe, A, GCI, HIG, HON, ISRG, MET, PCLN. For each of these stocks, the P&F Trend Indicator changed as of yesterday's closing prices. The options prices were derived using market prices as of this morning.

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