I hesitate to use the word 'ominous', but the S&P 500 (shown here in ETF form) is close to generating a very bearish stochastic signal on the long-term chart. When ascending price peaks are matched by descending stochastic peaks, this is often a harbinger of trouble. In this case, there are not the usual two tops headed toward such a divergence, but three, each diverging relative to the other two. A simple way to interpret this is to say that the S&Ps have been unable to get as overbought with each successive, record peak. The implication is that traders/investors have grown less enthusiastic about buying as the S&Ps have achieved a series of record highs spaced weeks apart. What to Watch For The divergence would become menacing if the blue line were to roll down through the red line. This would occur if, over the next several weeks, each new price bar closes on successive Fridays toward the lower end of the bar as the S&Ps go higher or sideways. Alternatively, if the rally continues for a couple more weeks, with Friday closes toward the upper end of each bar, that would negate the divergence and turn the stochastic indicator benign (or at least in more felicitous agreement with the uptrend). We won't know for at least another 2-3 weeks which is about to occur, but because a third diverging peak could have such dire implications, the chart is worth monitoring closely. _______ UPDATE (Jul 14): Friday's close at the very top of last week's price bar diminished the odds of a bearish stochastic divergence like the one described above. Another strong close this week and the chart would look much less threatening.
We hold two residual Nov 2 200 puts effectively for free, but let's try to add to the short position on this rally. The bullish pattern I've used yields the most conservative big-picture target possible, but it comes with no guarantees that 222.18 will even be reached. Still, I'd rather miss buying puts than be sitting on them through an 800-point Dow rally. My gut feeling is that, in this case, getting short at p=216.70 is asking for trouble. For the time being, we'll plan on shorting only if and when D is reached or closely approached. For now, let''s try to leg into a bullish calendar spread, starting with a 0.06 bid for 12 Nov 11 222 calls, day order. Make it contingent on the underlying trading 214.70 or higher. If SPY slips below that price, use a 0.04 bid for 24 calls and leave it in for the rest of the day. If we buy the calls, we'll wait for the next rally so that we can offer an equal number of calls short at the same strike, but with a closer-in expiration. ______ UPDATE (Oct 26, 7:36 p.m. ET): Buyers having failed us, let's turn our gaze lower, putting aside the rally we'd wanted to short. SPY now looks bound for the 209.83 target shown, a plunge that we will be confirmed if and when the downtrend smashes the 212.58 midpoint pivot shown (see inset, a new chart).______ UPDATE (Nov 1, 5:38 p.m.): Today's plunge exceeded the 209.83 target by 0.20 points -- not quite enough for us to infer that another dive is imminent and unavoidable. We'll monitor the bounce closely for signs of fatigue, but if SPY should relapse, the next important stop below would be 207.31.
Based on actual fills reported by subscribers, I am tracking a position that includes eight Oct 21 200-195 put spreads, twelve naked Oct 21 200 puts and two Nov 200 puts. Our total risk has been reduced by judicious timing and partial-profit-taking to just $4 -- the price of an ice cream cone. These are pretty good odds for what amounts to a longshot bet. How good? If SPY were to collapse this week, falling below 195 (see inset), the position would show a profit of about $11,000. Plus, the November 18 200 puts would still have nearly a month left on them. I will continue to offer juicy set-ups like these, since they give us a way to leverage a stock market crash without risking more than literal pocket change. It is irresistible fun to make these bets for two reasons: 1) a market crash at some point is absolutely inevitable, and 2) we can do so with almost zero risk. If you're eager to play, stay tuned to my SPY touts and to the chat room for opportunities as they develop in real time. ________ UPDATE (October 23): Our spread position went out worthless, but we lost nothing because of the timely offset we'd acquired. Because the bull market is very probably in its death throes, we'll continue to look for risk-less bear spreads to leg into. In the meantime, the tracking position still contains two (or some multiple thereof) Nov 2 200 puts.
I’m tracking a position consisting of eight Oct 21 200 – 195 puts spreads with a credit basis of 0.37, as well as 12 naked Oct 21 200 puts purchased last week for 0.25. The entire position nets out to a debit of $4, which is as much as we can lose -- the cost of an ice cream cone. The maximum potential gain would be $10,000 if SPY were to fall below 195 from a current 215 before the options expire in two weeks. This is a longshot bet, but the effective, 2500-to-1 odds we are getting were too tempting to pass up. Also, SPY need fall only to 199, a 7.5% drop, for our position to start paying off at $2000 per point. Win, lose or draw, we will continue to make bets like this one, since all bull markets must end, and in particular because this one's death is long overdue._______ UPDATE (Oct 10, 2:25 p.m. ET): Bid 0.56 for four Nov 18 200 puts, day order. (They are currently trading for 0.62 off an intraday low of 0.59.) ________ UPDATE (8:26 p.m.): Pull the bid for now. I've got a higher target outstanding for the E-Mini S&Ps, but I remain to be convinced that bulls have the moxie to get there soon without some timely emanations from the Fed. _______ UPDATE (Oct 11, 2:50 p.m.): Since we have so very little at risk, there's no urgency about turning the 12 naked Oct 21 200 puts into a vertical bear spread. Even so, you should offer a dozen Oct 21 195 puts short for 0.30 against the puts we already hold, good-till-canceled. The broad averages are falling hard today, but we don't want to make the mistake of limiting our profits when exactly what we've been expecting
I'm tracking a position consisting of eight Oct 21 200 - 195 puts spreads with a credit cost-basis of 0.37. Let's try to augment the position with a 0.35 bid for four more Oct 21 200 puts, good on the opening only (i.e., fill-or-kill); and a 0.31 bid, day order, for eight more. Since the price of these calls is going to be wildly unpredictable at best on Friday, especially if stocks open significantly lower, you should check back for updates during the day. My goal is to leg into some more riskless vertical bear spreads if SPY falls after we have bought more Oct 21 200 puts. Usually I am ultra-cautious in bidding options, but in this case we shouldn't hesitate to pay up a little -- meaning 0.05 to 0.10 -- if the puts can be bought for 0.40 or less. What I do not want you to experience is getting raped on a market order in the opening minutes of the session. SPY could be down by just 0.10-0.15, and the puts, which settled Thursday quoted at 0.28/0.30, might be trading for as much as 0.45. For that reason, I would recommend this gambit only to experienced option traders._______ UPDATE (Sep 30 11:05 a.m. EDT): The S&Ps opened significantly higher this morning, allowing subscribers to purchase puts below yesterday's closing price. I'll add 12 of them to the tracking position @0.25. Now we'll be looking to short 12 Oct 21 195 puts against them for 0.25 or more if the opportunity arises. For the time being, offer them a .040, good-till canceled. _______UPDATE (Oct 5, 10:09 a.m.): I continue to believe that any rally should be used to buy puts, implying we should try to augment our SPY position again this morning as long as the usual
Based on reports from subscribers in the chat room who legged into the position detailed here last week, I am tracking the Oct 21 200 - 195 put spread eight times for a net credit of 0.37. As is my custom, I use the worst fill reported, since I never want to be in the position of saying a Rick's Picks recommendation made money in theory when my subscribers have failed to do so in practice. Nor do I ever want to overstate the profit on any trade, since results could vary significantly from one subscriber to the next. The position detailed above cannot lose money, however, and it will produce a gain of exactly $296 if SPY is trading 200 or higher come October 21, when the options expire. However, the gain would increase by $800 for each one-point drop below 200, to a maximum of $4296 at 195 or lower. That would represent an additional fall of 8.7%, about two-and-a-half times the magnitude of SPY's plunge last week from near-record highs. Stay tuned for updates, since I will try to augment our short position, with risk as tightly controlled as possible, if the opportunity should arise. Essentially, this will entail buying out-of-the-money puts when SPY is close to a rally target, then turning the position into a vertical bear spread by shorting puts on any subsequent weakness. Our goal will be to short the puts for at least as much as we've paid for the ones we are long. The result would be a virtually riskless vertical bear spread similar to the tracking position noted above. This bull market feels to me like it's on its last legs. However, we should never presume to be able to predict exactly when El Toro, however deservedly, will drop dead. Using
After rolling our calendar spread, I am tracking a position that includes eight Oct 21 200 puts with an effective cost basis of 0.56 and eight Sep 23 199 puts shorted for (effectively) 0.20. In retrospect, I would have preferred rolling into a vertical put spread by shorting some Oct 21 195 puts for more than we paid for the 200-strike puts that we are long. When I initially offered a calendar spread to bet on a drop in the broad averages, I was not expecting SPY to fall quite as steeply as it has. No matter. The position is solidly profitable and would become even moreso if the broad averages continue lower. At the risk of confusing less experienced traders (who were explicitly instructed NOT to attempt the trade), I'll suggest modifying the position as implied above. In practice, this would entail short-selling eight October 21 195 puts and covering (i.e., buying back) the eight Sep 23 199 puts we are short for a net credit of 0.76 or better. On Friday's closing prices, you could have shorted the Oct 21 195s for 1.01 and covered the Sep 23 199 puts for 0.44, for a net credit of 0.57. The result would be a $5 vertical bear spread with the potential to produce a $443 profit per spread and a loss no greater than $19 per spread. Those are great odds, and you shouldn't hesitate to take them if similar prices obtain on Monday when stocks opened. However, if SPY should open weak, the increase in premium obtained for shorting the Oct 21 195 puts would be more than the increase in the cost of covering the short Sep 23 199 puts. This would effectively give you the $5 vertical bear spread for a net credit, meaning no loss
The broad averages have made no headway for nearly two months and are looking heavier by the day. Although we should have no illusions about timing the onset of the Big One, we can still prepare for it without taking much risk. Accordingly, I'll suggest buying the Oct 21 200 - Sep 16 199 put spread eight times for a 0.57 debit. This is a slightly vertical calendar spread with a bearish bias and a maximum payoff if SPY falls to 200 between now and October 21. The idea behind the strategy is to bide our time waiting for the Big One, paying for our long puts by shorting weekly puts against them every Friday. We will do so by rolling the spread forward each week. This means that on September 16, we'll cover the short Sep 16 puts (i.e., buy them back), presumably for 0.01-0.02; at the same time, we'll short an equal number of Sep 23 199 weekly puts. By rolling the calendar spread as described, we'll retain our monthly Oct 21 puts while always being short more-rapidly-decaying weekly puts against them. Ideally, if SPY falls toward 200 over the next few weeks, we'll receive higher and higher prices for the puts that we short. With any luck, SPY will drop to 200 over the next six weeks, and the Oct 21 200 puts we've held all along will effectively have cost us nothing. For now, you can bid 0.57 for the spread eight times, good till Thursday and contingent on SPY trading 218 or higher. If you find the above even slightly confusing, DO NOT ATTEMPT THIS TRADE. There will be other chances to try similar strategies in the future, but you should watch from the sidelines the first few times in order to gain experience. Note
A rally target at 205.71 is equivalent to the one I've flagged in DIA to get short. Options on this vehicle are far more liquid, however, and so you might want to train your firepower on some Nov 22 204 puts, buying eight of them when SPY gets within 0.03 to 0.04 cents of the target. My (very) rough guess is that the puts will be trading for around 0.62 cents, but you should adjust your bid according to actual market conditions. Watch the bid/asked spread for the puts as SPY gets closer to 205.71, and try to position your bid in the middle of the spread when it comes time to act. If you're filled, tie the puts to a stop-loss 0.12 below where you've bought them. As always, if you see a good opportunity to get long for the presumptive rally, any profits booked thereof can be used to increase the position size of your short, or to widen the stop-loss. ______ UPDATE (11:15 a.m. EST): We used a lesser target at 204.86 this morning to get short. (See my 10:00 a.m. post in the chat room, which aired as SPY was ascending toward the target. The actual high was 204.83, followed by a so-far drop of 77 cents! [ Further update: SPY dropped $1.12 before finally turning around.] Nov 14 204 puts that traded down to 0.22 have now doubled in price, and I've suggested taking a partial profit on half of any put positions to zero out our risk. _______ UPDATE (5:56 p.m.): After yesterday's profitable digression, we'll get back on track for the trade spelled out above, possibly adjusting the option price in real time in the chat room. We should also be on the alert for a possible downturn from 205.28 as well. That's
While most bank stocks are trading far below their highs, Wells appears headed into the ozone. Their all-in bet on residential mortgages has paid off as the housing bubble, er, boom washes away any vestigial notions about real estate being risky. From a technical standpoint, the stock looks bound for a minimum 39.85 over the near term. Although that would still leave it $5 shy of the 44.52 peak achieved before the Great Financial Crash of 2008-09, the peak would likely become magnetic once WFC has broken the $40 barrier.
