Friday, May 29, 2009

The broad strokes I have used to paint a picture of the E-Mini S&P for Friday may be helpful, although we should always leave room for a nasty surprise. The crux of it is that shares will fall if DaBoyz cannot pop the broad averages above Wednesday's highs in the early going.

A rally target broached here earlier is still viable and will give us a logical place to try and get short. Accordingly, if and when the stock gets within 5-10 cents of that target, buy two _____ puts (GSVD). A price of around 5.60 would be pretty attractive, but you should base your bid on the bid reflected by market makers if and when the target is closely approached.

The bearish pattern shown in the chart projects to 112^09, an implied disaster that would send yields soaring well above the levels that triggered scare headlines earlier in the week. For its part, Wall Street seemed not the least bit scared, since the broad averages have remained mixed. But if June Bonds are about to plummet to our target, that could put an end to the complacency that has contributed to, among other things, the powerful short-squeeze rally in bank stocks.

The short-squeeze rally into the final bell turned chicken just shy of Wednesday's supply zone, suggesting DaBoyz will try to pop it through the resistance if there's a flurry of market orders to begin the day. If  They can't goose the futures above that level (i.e., 914.00)  in the early going, however, I doubt that they'll be able to do so later in the day. That would leave stocks treading water and vulnerable to a selloff  ahead of the weekend.

This is a heads-up, since we are close to getting filled on our order to short four June 10 calls for 0.70 against four September 10 calls we already hold for an average 0.69. Offer the calls on the opening for 0.65 -- a nickel less than I suggested here earlier -- but if the order goes unfilled, raise the offer to 0.70 and leave it in for the rest of the session. I would also suggest checking this tout after the first hour or so, since it may be advantageous to change our game plan on-the-fly.

Firming quotes for gold and silver in recent days have filled our sails, allowing us to spread off the risk in bullish options positions we hold in two issues popular with Rick's Picks subscribers - Silver Wheaton (SLW) and the Gold Miners ETF (GDX). A while back, we bought calls in both with the intention of later shorting options of an earlier expiration against them. However, with precious metal prices relatively flat for a spell, there were no good opportunities to do so. Yesterday, however, GDX extended a strong rally far enough that we were able to short June 45 calls against some June 43 calls we already held. We had paid an average 1.75 apiece for the latter, implying that we could have lost as much as $175 per option with GDX trading below 43 when the options expire on June 19.  But by shorting June 45 calls for 1.20, we were able to cut that risk by more than two-thirds, effectively legging into a $2 vertical bull spread for 0.55 that is trading in-the-money. That means the most we can lose is $55 per spread, and the most we can gain is $200 - a risk:reward ratio of nearly 1:3.  Our maximum gain would come with GDX trading anywhere above 45; it settled yesterday ay 43.01 and looks feisty enough to continue higher in the weeks ahead. In Silver Wheaton, we still need a little more price movement to get filled on our hedge order. For some time, we have held four September 10 calls with a cost basis of  0.69.  Those calls could be sold yesterday for as much as 1.50, but our goal is to milk even more profit from them by shorting June, July and August calls against them successively in the coming months. Our