We got short at the top on Friday, but how long will Mr. Market let us enjoy the ride? Our vehicle, QQQ put options, nearly ran off the road on Tuesday when the Dow began the day with a 125-point rally. A pullback in the early going shaved that gain by two-thirds, but by early afternoon bulls were beating on the highs, threatening to send bears into a new round of short-covering. The pessimists got a reprieve, however, when something spooked the market late in the session, sending the Industrial Average into a 225-point dive that left it 66 points lower on the day. It was not a session for the faint-hearted. Still, the outcome boosted the value of our put position, leaving Rick’s Picks subscribers in good shape to try to lock in a profit no matter what the stock market does as 2011 draws to an unpredictable close. » Read the full article
I’m tracking the purchase of some Jan 134 calls yesterday in SPY — a first step in legging on the 134-137-140 butterfly. SPY is falling too hard for me to be comfortable, but we’ll stick with the position nonetheless, since it would give us reason to root for a rally for a rare change.
We hold two Jan 54 puts and two Jan 53 puts with a profit-adjusted cost basis of, respectively, 0.76 and 0.57. I’d suggested shorting December 54 and 53 monthly puts against them for the same price, but I’ll now recommend instead that you short January calls three strikes below what you own for the same price or higher. Thus, if you hold eight January 54 puts for 0.76, you should try to short eight January 51 puts against them for at least 0.76. I estimate that the Cubes would need to fall to around 54.80 (Note: I’ve raised this number) within the next week or so to get the offer filled. Our current, minimum downside objective is 54.87, a Hidden Pivot midpoint. _______ UPDATE (10:42 a.m. EST): I am recommending that you complete the spread immediately by hitting the 0.69 bid or the 0.54 bid in, respectively, Jan 51 puts or Jan 50 puts. Once you’ve completed the spread(s) as suggested, this reverse-Santa Rally position will offer great odds, since, although either spread will produce a profit of $300 if Santa drops dead (so to speak), the most we can lose in theory, commissions aside, is $7 on each Jan 54-51 put spread and $3 on each Jan 53-50 put spread. _______ FURTHER UPDATE (1:24 p.m. EST): The Cubes fell a bit lower after the trading alert was disseminated above and in the chat room, and it would therefore have been possible to short either the Jan 51 puts or the Jan 50 puts for somewhat more than we paid for the long side of our position. Officially, however, I will record a short sale at the prices suggested above. That will give a cost basis of 0.07 ($7) for the Jan 54-51 puts spread, and 0.03 $3.00) for the Jan 53-Jan 50 put spread. Thus, in theory — and almost surely in practice, the most we can lose, based on two spreads at either pair of strikes, is, respectively, $14 or $6. The potential gain would be $600 for either position, predicated on the QQQs trading $50 or lower come January 20.
Click here if you’d like to learn more about the Hidden Pivot Method, including how to identify and trade targets such as the ones used above, and to forecast trends with bold confidence.
We don’t pay much attention to this vehicle other than at key turning points, but the short-term pattern shown looks like a lay-up for traders who see futures contracts as no more than bouncing dots on a chart, waiting to be exploited. There are actually two trade possibilities here: 1) a ‘camouflage’ short as USM slips below the 132^13 midpoint; 2) and a very tightly stopped long from within a tick or two of the 131^17 target. Good luck! Please report any fills in the chat room so that I can establish a tracking position for your further guidance. ______ UPDATE (3:17 p.m. ET): The short was tricky to initiate, but once aboard, your reward came quickly with a drop to a so-far low at 131^26. As noted above, the short should be covered and reversed near 131^17. ______ UPDATE (April 6, 3:57 p.m.): The low of Friday’s violent price swings was 131^21 — not quite close enough to have gotten you long easily. Although this could prove to be an important low for the short- to intermediate term, under the circumstances I’ll assume no subscribers were filled. _______ UPDATE (April 11, 1:03 a.m.): Next important stop on the way higher: 135^17.