SPYDERS: Proceed With Caution

Hi, Friends, these are interesting times, and there are plenty of very highly paid people, with lots of money under management, who are finding the navigating stressful. Friday brings options, index options and futures expiry, while Sunday offers the Greek elections. There’s plenty of additional headline risk in Europe. If I may summarize, the only good news is that things are sufficiently bad that the Fed might move to a third round of quantitative easing (“QE3”), which many pundits believe would be well-received by equity traders.

I’ve been trading around in the SPY, the ETF that is derived from the SPX. On the daily chart, it remains in a downtrend, with potential resistance points at 133.50 or so and around 136. The recent high – which occurred yesterday – was 134.25. The recent low was 127.135. At the moment, I have Jul bear call spreads on with short strikes at 134 and 136, long strikes protecting them at 135 and 137. These are not, obviously, aggressive positions; the most that I can lose is $100 per contract (the distance between the long and short strikes) less the premium received.

If SPY sags, I’ll look to put bull put spreads on, forming a condor. I’m hoping to do this with short 127 strikes, but we’ll see; if the price action moves in that direction, the bear call spreads will be nicely profitable, and with the lower Keltner Channel band close to 131, there may be some initial support there.

I’m staying cautious at present because the market has been jerky enough to make it painful to be either long or short for very long. I work with some of the largest institutional managers in the U.S., although primarily with fixed income desks, as they’re more active in FX. My sense, however, is that very few investors, including the big girls and boys,  currently possess the confidence to trade in longer timeframes. At present, they’re taking profits if and when they have them. In addition to keeping conservative, one-month structures on, I’m leaving profit orders as soon as the opening orders are filled. I don’t want to miss one.

Here’s hoping that everyone reading this is getting lots of profit orders filled. We’ll have plenty of inputs in the remainder of this week and early next week, and they’re likely to create many potentially profitable trade setups. At the same time, even (or especially) if we’re sure we’re right about market direction, it’s important to remain disciplined about protecting against large losses through the use of stops or at least alerts. We can be right based on today’s news, but there are plenty of potential unknowns that can quickly become expensive.

Best of luck!

About the Author Brian Keith


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