Diamonds

If a Hidden Pivot support at 107.59 is hit with DIA having gone no higher than 108.14, bottom-fish there by buying two October 108 calls. They should be tied to 107.52 stop-loss in the underlying vehicle. To avoid paying up for the calls, a strict no-no in my book, I suggest monitoring the bid/asked spread as the stock closely approaches the target.  If you don't know how to use an option calculator -- as why should you? -- the best way to determine how much to pay for an option is to determine how much the pros are paying for it.  _______ UPDATE (10:25 a.m. EDT): The trade was a non-starter, since DIA went no lower than 108.11 overnight.

We'll book a $266 loss in order to get this trade -- long two October 101 puts @1.33 -- out of our face. It was a pipe dream to think the broad averages might actually fall far enough to turn 101-strike October puts into winners, but at least we didn't jump on the erstwhile opportunity when the puts were trading above 5.00, as they did in late July. There's still a bid for the puts, so I'll record an actual trading loss of $218. That's assuming we blow them out for 0.24 apiece.

Yesterday's opening-bar short squeeze noticeably failed to pierce a pair of weakling highs recorded in mid-August, subtly hinting of buyers' gutlessness right now. We rarely speculate on such things, but what could it hurt to take a couple of put options home over the weekend? Treat this trade like a likely loser -- meaning, don't buy more than the couple of put options I am about to suggest. Make them October 101s, which settled yesterday at 1.39.  A price anywhere between 1.25 and 1.35 would be okay, but keep in mind that they will start to feel the weight of expiring September puts toward day's end, so if you are modeling their fair value, Monday's date is the one to plug in. _______ UPDATE (12:41 p.m. EDT):  We bought two October 101 puts on the opening for 1.33, a penny off the so-far intraday low. Now, put them out of mind for the time being.

Our backspread -- short August 102 puts, long August 98 puts in a 1:2 ratio three times -- opened @0.14, but prices steepened thereafter and the spread closed at 0.41. I'll assume an exit for 0.20 or less, which would have raised our $228 theoretical loss by a total of $60  (i.e., we paid 0.76 per spread to get in and another 0.20 to get out). We were unable to purchase September 101 puts for 1.00 as I'd suggested, since they never traded lower than  1.49. Expect the Diamonds to continue to fall, presumably to at least 102.54, a Hidden Pivot that comes from the 15-minute chart (see inset).  Shorting the downtrend will have to be on your terms, since I cannot predict how DIA will open, but if you choose to bottom-fish at 102.54, risk no more than a 15-cent stop-loss on any near-the-money calls acquired. _______ UPDATE (1:10 p.m. EDT):  My forecast very nearly caught the low, since it occurred at 102.78, but that was not quite close enough to get us aboard for officially for the bottom-fishing trade suggested above.

Let's try to cover our three put spreads for a debit of no more than 16 cents per, since this backspread position can only hurt us if the Dow plummets next week. In fact, we wouldn't start to make money on it unless the Dow were to fall more than 900 points.  At yesterday's closing prices the spread could easily have been bought back for a 0.13 debit by selling two August 98 puts @ 0.06 and buying one August 102 put for 0.25. Also, for good measure, bid 1.00 for four September 101 puts, day order.

Yesterday's asphyxiating, range-bound slog, which baby-stepped the Diamonds to within 0.24 points of a 107.61 target, killed my appetite for the trade, but we'll do it anyway because the target itself remains valid.  Short there however you please, but I'd suggest stopping yourself out if the September 104 puts go into the red by 20 cents or more.  We'll also need to be alert to the possibility that yesterday's rally, close as it came to the target, may have been a final gasp of at least short-term importance.  We are currently long a bear put spread three times @ 0.76 — short three August 102 puts against six long August 98 puts.

A previously identified rally target at 107.61 remains the best short-term play I can foresee at the moment.  That implies more than a point of upside potential to consider -- and possibly to leverage -- before we attempt to get short. Traders should be ready for the opportunity, which would come on the hourly chart this morning with a pop to between the two peaks of the last two days -- respectively at 106.88 and 107.09 -- followed by a b-c pullback and a new thrust.  If this all occurs in the first 60 to 90 seconds of the session, the opportunity would become all the more attractive, but you'll need to be ready for it. (Note: We remain short the August 102/98 put three times in a 1:2 ratio @ 0.76 per, but we've written off this backspread for a $228 loss.)

The more eager we grow to short this airborne turd, the less obliging it becomes.  Look at the three-minute chart if you want to see price action that's bound and determined to make nonsense of any prediction or strategy we might hazard. Previously identified rally targets at 107.61 and 108.75 remain valid nonetheless, but I'm not going to pretend they're likely to blossom into opportunities today. Suit yourself, since this one will have to be catch-as-catch-can into week's end.  We remain short the August 102/98 put three times in a 1:2 ratio @ 0.76 per.

So far this week, the Diamonds have barely improved on the dubious gain they achieved when they gapped higher on Monday's opening bar. Still, we've got our fingers crossed, hoping for a finishing stroke to 107.61 by week's end.  That's where I've recommended buying four September 104 puts, using a 20-cent stop-loss on the put. If you buy the puts with the Diamonds trading at or very close to the target, your theoretical risk, commissions included, would not be much more than about $100. Please note that if the stop is hit, DIA should be presumed headed to at least 108.75, the Hidden Pivot target of a lesser pattern.  We'll want to try shorting there, again using the Sept 104 puts and a 20-cent stop-loss. We are currently long a bear put spread three times @ 0.76 -- short three August 102 puts against six long August 98 puts.