The More Things Change … Or Do They?

Hi, Friends, here’s hoping that all is going well. It was a little nasty to have the non-farm payrolls number released on a day when cash equities were closed, but it was pretty clear that we were going to have a fairly severe downdraft today. As I look at the daily chart of the SPX, prices have declined into support, although the criteria that Todd uses to identify a trend reversal haven’t been met, as yet.

 

The hourly chart shows a different story; the SPX has located a tentative bottom at 1378.24, but it’s now in a downtrend, with resistance looking likely to be found just above the 50% retracement, roughly 1400 to 1404. It seems to me that longs might still work, but it’s always tough to buy when a downdraft is occurring. It does seem appropriate to keep stops tighter on long positions now. As it happens, I have some net long positions on (via bull put spreads  – Apr 138/136 and 137/135 – on the SPY).  Time decay will of course be working in my favor with only 11 days to go until expiry, but I’ll be looking at closing out the short legs (the bullish part) on a break below 1372 on the SPX.

For those trading off the hourly chart,  a move back above 1395 on the index looks like a plausible place to begin looking for an opportunity to sell. I would probably want to get confirmation from one of the three price patterns that Todd identifies in his course, but a quick short position put on somewhere between 1395 and 1400, with a stop around 1406, and an initial profit target of 1389 or so (basically, half the distance between the proposed entry level for the trade and the recent low) looks to have a fair chance of success.

For what it’s worth, I’ve taken a different tack; I came into today short a number of SPY Apr 138 puts (bullish), protected by long 136 puts (bearish). This position works if the SPY (a derivative of the SPX) moves higher or does nothing, and benefits from time decay. With the sharp move lower this morning, they looked less appealing.

As noted, the daily chart is at support, so I put on some additional spreads, this time shorting SPY Apr 137 puts and protecting them with long Apr 135 puts. I earned a credit of 0.48/share for these, or 48.00 per contract, risking thus risking a net 1.52, or 152.oo per contract, which would occur on any close at expiry below 135. Please note that although I never let options lose more than half of their maximum value before taking my lumps and closing them out, these structures offer built in stops. The most that I can lose is the distance between the short and long strikes (2.00, in these examples) less the premium that I receive up front (plus commissions, but they’re very small these days). 

As I’ve mentioned here previously, I’m often wrong, and it’s certainly possible that SPX and its SPY derivative could continue motoring south. To make that somewhat less painful should it occur, I put on a bear call spread by selling SPY Apr 141 calls and buying the 143 calls, earning 0.25 per share, or 25.00 per contract. In effect, I’ve constructed a condor, which benefits when the underlying trades within a range and from time decay. Maximum profit is reached on a close at expiry between 137 and 141, the equivalent of a 40 point range for the SPX. If the market continues south, this will cover half of the losses on my bull put spread,even if worse comes to worst. I continue to be net short the gold ETF, GLD, via bear call spreads (short Apr 164 and 165 calls, long Apr 166 and 167 calls).

Just a few intraday thoughts; best of luck with your trading.

 

About the Author Brian Keith

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