We took a stand against Friday’s rally, speculating on a downturn with the purchase of 12 March 7 150 puts.  Although subscribers reported buying them for as little as 0.59, I will use the worst price reported, 0.64, as is my custom. A 0.49 stop-loss is suggested, meaning you should exit the position on a sell-stop if the puts trade down to 0.49.  Please note that I would be inclined to try again if DIA continues to move higher, as appeared likely when last week ended. In tracking the theoretical gain or loss of this position, I will impute continuing results to a paper profit of $1920 realized from an earlier short in this vehicle. It was established in mid-January by first buying 12 Feb 7 158 puts for an average 0.34, then shorting 12 Feb 7 155 puts against them for the same price when DIA was falling.

I advised taking profits on eight of those contracts at two different intervals — a tactic that would have locked in a gain of at least $1280 no matter what DIA did subsequently.  However, holding onto four contracts until Friday was a riskier gamble.  Although the puts could have produced an additional gain of $1200 had the DJIA rallied less than 200 points after bottoming Wednesday morning, the blue chip average in fact rallied 450 points. Even so, subscribers could have added $640 to the gain on the overall position if they sold the spreads at the lower end of the range I’d flagged the night before.  This was easily possible when the Dow dropped nearly 100 points Friday after squeezing the bejeezus out of bears during the opening minutes of the session.

The technical picture suggests short-covering could drive this gas-bag as high as 159.10 as the new week begins. We would likely have gotten stopped out of the puts by then, but looking nonetheless for a new opportunity to do it again.