OptionsVest

While I am on vacation this week, check out my comments on the merits of last week’s Put Spread Stock Collar post and how this would compare to the Bull Call Spread for the cautious bull on AAPL.

JD

The 50 day MA has provided strong support for the SP 500, DJIA, and the Nasdaq as the stock market has risen from the ashes of the March lows. After last week’s pull back, the DJIA is still being held up at this level, but the SP 500 and the Nasdaq are being held back by this widely followed moving average.

While all three of these indices broke down through the 50 day MA back in June, they were all held up by the lower Bollinger Band,  just as they are today. What may be more important here is that the 200 day MA is not providing the reinforcement that it was back in July.  Should we break down from here, that is most likely how far down this market could go. That would turn this 5% pull back into a 15% correction.

With unemployment coming out on Friday, this will be an important week for the financial markets. This could be a good opportunity to add to long positions, take your profits and sit on the sidelines while the market corrects, or at least add some insurance to your current positions by using option strategies.

JD

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

The stock market is once again approaching levels of support, this time at 9600 for the DJIA, 1040 for the SP 500, and 1675 for the Nasdaq. Since March, every time stocks have come down to their 20 day MA, they have provided bulls an opportunity to get into the market at better price levels. While a drop below these levels would signal a market correction rather than a pull back, we would have to see a close below 9200 in the DJIA, 1000 in the SP 500, and 1600 in the Nasdaq to signal an end to the market’s 6 month bull run.

We should know early this week if the first of these levels is likely to provide some support.  Traders can continue to hold their bearish option positions until one of these levels holds the market up.  If and when this happens both traders and investors can open or add to their long positions.

JD

The stock market hit a new intra-day high today after the FED left interest rates unchanged. While the expectation for low inflation helped bonds hold on to big gains, that may have done in stocks.

From a technical perspective, the SP 500, the Nasdaq, and DJIA all had candlesticks that were a cross between bearish engulfing and inverted hammer on heavier volume.  Combining these candles with momentum indicators that are showing a slowdown in the current uptrend, may signal that the market is finally be ready to take a breather.

Traders should be able to take advantage of this market correction on the way down, while investors could use this pull back to add to their long positions.

JD

The stock market continues to drift higher reaching a new high for the year this week. We continue to be concerned with the lack of momentum, though we must remind ourselves than markets can remain overbought (or oversold for that matter) for a long time. That being said, investors continue to take advantage of 5% dips in the market to load up on stocks, but each time they do it they show less conviction.

An option trade can be a safer way to tag along with this slow ride upward than an outright purchase. Using an option spread provides you with less risk should the next breather taken by the bulls turn into a full blown correction.

When the stock market broke out 10 days ago we mentioned the fact that it did so with a lack of volume. In addition, stocks reached new highs in the face of indicators like momentum showing a strong bearish divergence. Tuesday’s big drop in stocks was on the heaviest volume we have seen in quite some time.  This not only confirms that the bulls have quit buying, but also signals that they are starting to take some profits after stocks have had their best 6 months since the first half of 1975.

I still think that a  Bear Call Spread would be a good way to trade this market environment. At some point, like maybe when the SP 500 reaches support at 975, you could convert that to an Iron Condor by adding a Bull Put Spread if it looks like we will be staying in a trading range. For those of you that want to protect your long stock positions, consider the Stock Option Collar if you do not want to sell your positions.

JD

The stock market finally broke out of its trading range this week, which by all indications is a good sign for the bulls. That being said, one word of caution is the lack of volume. While the market continues to inch its way slowly north, it seems to be driven more by a lack of interest in selling than by strong buying. Still, technically there is nothing stopping the SP 500 from reaching 1050, so look for that to be the point where we begin to see the next pull back.

JD