Monday, September 29, 2014

In this week's commentary I outlined a strategy for shorting JNK by using out-of-the-money put calendar spreads. Although the example I used involved spreading January 35 puts that expire on the 17th day of the month against October 35 puts that expire on the 18th day of the month, we'll look to refine the strategy in the chat room in real time.  There is no great urgency about getting aboard, since this vehicle has been screwing the pooch for years. However, once we initiate the position, we'll roll  it forward using monthly (or perhaps weekly) puts similarly to the way described in the commentary.  At some point during the week, I'll also hold an online session to discuss the trade in greater detail.  Stay tuned to the chat room for further details.  You can receive timely email notifications of these sessions by checking the appropriate box on your 'My Account' page. ______ UPDATE (9:10 p.m.): I held a short webinar yesterday to explain in detail how to initiate the spread described above. Nearly 50 subscribers attended, and I would encourage all of you to put your new knowledge to work at your own pace. To repeat: There is no urgency, even if the junk bond market has come in for some selling lately. If you missed the presentation, I made a recording of it that will be available to all subscribers by no later than mid-day Wednesday. Meanwhile, anyone who fills an order using my strategy should let me know in the chat room so that I can establish a tracking position for your further guidance. I would encourage all to crowd-source the opportunity by comparing notes in the chat room. _______ UPDATE (October 9, 1:12 a.m.): In response to a question asked during yesterday's TLT workshop, I suggested a

The impulsively bullish pattern at the rightmost edge of the chart (see inset) is clear enough. However, DaBoyz were holding their cards close to their vests Sunday night with a very moderate selloff, making any speculation concerning their further intentions haphazard at best. We've seen in recent weeks, however, that shorts are still easily spooked, and it therefore seems likely that the mild weakness on display at the moment is designed to deplete sellers ahead of a Monday-morning goosing.  My suggestion is that we not be tempted to short into it too aggressively if it fails to impress.   Night owls can use the pattern shown to get long, presumably on a chart of even lesser degree. If the bull trade works, a reversal and tightly stopped short at D are encouraged.

Here’s an easy play for those who have never cashed a winning ticket trading put or call options. Specifically, I am going to tell you how to bet on a junk-bond crash without risking your shirt -- even if junk bonds continue to defy gravity indefinitely. First, let me assert that straight-up directional plays with stock options almost never win. Your odds are better trying to predict precisely when a shooting star will flash across the night sky. Similarly, if you buy call options with the expectation that a stock is about to surge, your timing had better be perfect, since the options you’ll be buying will be priced to discount any such event. Indeed, to make money on the calls, the move in the underlying vehicle would need to be so steep as to lie well outside the stock’s historical behavior.  Moreover, as implied above, you would need to initiate the trade just before the rally takes off, since, if you get in early, time decay will sap the value of your calls quickly. And you can forget about getting aboard after the rally has begun, since option prices will be goosed into the stratosphere mere minutes after the stock lurches higher. Our bet on a junk-bond disaster entails calendar-spreading put options on Barclay’s High-Yield Bond ETF (ARCX: JNK). This trading vehicle is shown in the chart above. As you can see, except for a couple of nasty dips that occurred several years ago, JNK hasn’t done much of anything since recovering from the Great Financial Crisis.  In retrospect, the only way an option trader could have made money on price movement this boring is to have sold straddles (i.e., puts and calls in combination) against JNK, and to have presciently refrained from doing so during the killer declines

A chat-room denizen said he was looking for an 'important bottom' in the euro, but the hourly chart shown is not encouraging on that point. Notice that a downtrending ABCD pattern that took nearly a month to play out bounced almost precisely from the 1.2707 target. However, the fact that the rally was weak and lasted only a day before the futures broke to new lows is indicative of a downtrend that very likely has farther to go.  Considering how long it took for the December contract to hit the target, we might have expected the bounce to last for at least 4-6 days. The one-day reaction implies not only that sellers remain unsatiated, but that they are eager to exit despite the extremely oversold condition of the euro.  How might that affect he currency in thw weeks ahead? A trendline on the weekly chart looks more suited to projecting an important low than any Hidden Pivot support I can identify. Connecting up key lows recorded  in June 2010 and July 2012 suggests such a low could occur at around 1.2214, roughly 3.7% below current levels.