18th July 2010
It is bad enough that the 50 day MA for the SP 500 is already below its 200 day MA, but Friday’s rejection of the 50 day MA on heavy volume completed a lower high an confirms the continuation of this markets downtrend from its peak in mid April. The DJIA was showing a bid more strength over the last couple of months, but that is not looking any better now. The 50 day MA on the Nasdaq is about to cross its 200 day MA to the downside to complete a triple confirmation of a downtrend.
There are a couple of ways you could play this market depending on how aggressive you want to be. For the conservative, the Bear Call Spread above the market would be a good approach. For example, you could sell the August SPY 110 Call and buy the SPY 112 Call. If you are more aggressive, you can go with the Bear Put Spread below the market. In this trade, you could buy the August DIA 100 Put and sell the DIA 98 Put.
JD
Posted in Commentary, Strategies, Trades | No Comments »
4th February 2010
Today’s big fall in the stock market established Tuesday’s rebound high as the first lower high in the stock market in 7 months last July. At that time, the SP 500 fell through it 50 day MA, but was held up by its 200 day MA a week later. Since then, the 50 day MA has provided support since the market broke through once again last Friday. What we now see is that the 50 day MA has turned into resistance.
With such a big fall today, option prices are going to be more expensive than they have been in quite some time. If you are going to put on a trade, I would suggest you make it some type of option spread trade so you do not get killed if the market calms down and volatility drops. At this point, I will not speculate on what could be next, except to say that the SP 500 should find support around 1035, the DJIA at 9700, and the Nasdaq around 2100.
This market action is a confirmation that we are in a correction. The only thing we do not know now is how big that correction is going to be.
JD
Posted in Commentary | No Comments »
27th October 2009
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
Posted in Strategies | 4 Comments »
