Wednesday, August 22, 2012

Because the recent high exceeded last March's watershed top, it would be a great place for Mr. Market to spring a nasty bull trap. We should therefore be on our guard against a spectacular collapse from these heights, notwithstanding the fact that I've drum-rolled Dow 14000 recently.  To join our vigil in real time, click here for a free subscription.

Staying short this little sonofabitch, even off  perfectly timed entries, has proven so difficult lately that being short is probably what we should want to be. Even if not, and assuming a topping pattern is under way that could take yet more weeks to complete, we should be prepared for increasingly vicious swings in both directions. Most immediately, yesterday's dive remains a work in progress, with a 1405.00 midpoint support and, if exceeded, a 1396.75 'D' target. However, without some more distributive chop Tuesday night, I hesitate to suggest bottom-fishing either number, even via camouflage. Alternatively, there being no 'external' lows to leverage for purposes of getting short, I'm going to suggest remaining on the sidelines for now.

Based on activity reported by subscribers yesterday in the chat room, I'm tracking eight December 620-October 620 put spreads @ 14.00, with a kicker of four September 615 puts shorted @ 6.20.  To reduce margin requirements or get around account restrictions, some of you may have spread off the naked Seps by buying puts of a lower strike. However, if there are any changes in the "official" position, I'll include specific spread-trading advice as well. So that we don't underestimate the potential danger represented by the naked Seps, I'll monitor their fluctuations closely.  Their delta value is small, but if AAPL were to fall 30-40 points in a day, they would probably rise by enough to at least offset our gains on the spreads. For that reason, I'll suggest keeping close tabs on my updates, and if you haven't done so already, signing up for "E-mail Notifications" on your My Account page.  These e-mails are sent out in real time and represent the quickest way I can inform you of a position change. I will generally do so in the chat room as well, and always via a written update to the tout itself, but the 'Notifications' feature allows you to tailor the alert on the receiving end to whatever literal bells and whistles you might require. For now, though, and regardless of whether you've already spread off the Sep 615 puts, I'll suggest bidding 4.20 for four September 625 puts, good-till-canceled. If successful, we'll have lowered our margin requirement and locked in some better-than-free puts tied to the nearest expiration month. 

Looking for a cheap, low-risk way to play a $600 stock that can lurch and careen all over the place on any day?  We’re talking about Apple, of course, and you needn’t fear the stock if you use puts and calls judiciously and follow some simple rules. Yesterday, for instance, Rick’s Picks suggested calendar-spreading some far-out-of-the-money puts to establish a moderately bearish position.  Although we’ve been quite bullish on the stock and remain so, it may have gotten ahead of itself with the nearly 20% gains achieved so far in August.  Accordingly, when AAPL spiked yesterday morning to a new all-time high of 675, it seemed like a great opportunity to buy some put calendar spreads at the 620 strike, well below current levels. Specifically, we recommended buying the December 620 – October 620 put spread eight times for $14, or $1400 per. This strategy is not outright bearish on Apple; it merely leverages the possibility that the stock is overdue for a nasty correction.  Incidentally, we elected not to buy put options outright simply because, in the 38 years we’ve been trading puts and calls, we have yet to come across a single person who has profited over time by buying naked puts (or calls). Take it from us: spread-trading is the only way to go. On this particular trade, the ideal outcome would be for Apple shares to fall slowly to around $620 ahead of the October 19 date on which the October puts we are short expire. Those puts would be theoretically worthless with the stock trading at or above $620, but the December 620 puts we bought as a hedge against them would have increased in value to as much as $3300. (That’s how much at-the-money put options with two months left on them are selling