Here’s a twist on the traditional Stock Option Collar that you might find is a less expensive way to protect your investments. Since the stock market has experienced an extreme fall, and an extreme bounce, there is a good probability that it will be trading in a tighter range over the next 6 months to a year. In addition, while the current slow down in upward market momentum is likely to provide a good opportunity to add to your long positions, the fact that the economy is not out of the woods means you should do so while exercising a bit of caution.

Given that scenario, the Put Spread Stock Collar is a way you can become a cautious stock market bull.  This trade is the combination of a Covered Call with a Bear Put Spread.

Here is an example with the SPY trading between 107 and 108:

Buy SPY at 107.50

Sell SPY June 120 Call

Buy SPY June 100 Put

Sell SPY June 90 Put

SPY Put Spread Stock Collar

You should be able to structure a trade similar to this for nothing more than the price of the SPY.  This trade does nothing for you besides giving you peace of mind if the stock market continues to trade within a normal 1 standard deviation range of where it is when you make your purchase. That is OK, because it provides some protection if the market falls quite a bit more than that, and allows you to participate in a normal level of growth.

The bad side: your growth is limited if the market sky rockets again and your protection is limited (but much better than nothing) if the market plummets again. Do not let that get in your way though, since there is a 95% chance that the market will stay within the effective range of this trade.

What do you think?

JD

The market continues to slowly drift its way northward, adding to the profits of those who have been bullish for quite some time. It does not matter if you are looking at a daily or a weekly chart, stocks are once again at the top of the Bollinger Bands. In addition, most momentum indicators are falling while the market is rising. While this can continue for quite some time, a pullback to the bottom of the Bollinger Bands is likely to provide you with a better buying opportunity than last week’s breakout to new highs.

JD

The SP 500, DJIA, and Nasdaq all settled near their 50 day MA, and the lower 20 day Bollinger Band on Friday. Monday’s bounce off of these levels provided the support that bulls were looking for as once again investors were buying on the dips. While Bollinger Bands provided stock market support back in June/July, this is the second time the 50 day MA has been tested, and the first time it has held, during this market rally.

While bearish traders with options expiring in October may want to take their small profits now, this market rally continues to show signs of losing steam. Besides heavier volume on down days, technical indicators continue to show divergence with stock prices. For example: Momentum, MACD, and Stochastics all made lower lows while prices have now made higher lows at this latest inflection point.

The battle between the bulls and bears rages on. Trade with caution.

JD