December 2011

Near yesterday’s lows, we locked in some bearish puts spreads that carry almost no theoretical risk but which coud produce substantial gains if stocks stay weak into 2012. Specifically, we now hold two January 54-51 puts spreads for a debit of 0.07 and two January 53-50 puts spreads for a debit of 0.03.  Both positions together cost us a total of $20, but they could produce a maximum profit of $1200 if things go our way. Effectively, we have gotten 60-to-1 odds on the QQQs trading 50 or lower by January 20. We’ll do nothing further for now, but I’ll send out an alert if a sharp downdraft in the broad averages should make it advantageous to cash out before expiration. Regarding the Cubes, yesterday’s plunge exceeded a 54.87 midpoint support by a decisive 29 cents, implying that weakness will continue down to at least 52.13, its ‘D’ sibling.  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 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.