I mentioned the 184.63 rally target shown during an ‘impromptu’ session, but this is the first time I’ve displayed it formally in a tout. Because of the clarity of this pattern, it makes for a very compelling price objective. Moreover, the pattern is gnarly enough, with poor symmetry and plenty of nasty chop, that we might expect the target to work very precisely because not everyone sees it. We do, however, and it is ample reason to gear up for some aggressive shorting if and when 184.63 is closely approached. There is 600 Dow points of implied upside, and so there is also good reason to trade now with a bullish bias. For now, I’ll recommend bidding 0.48 for 16 March 27 185/Feb 27 185 call calendar spreads. This is a day order, valid if DIA is trading above 178. _______ UPDATE (Feb 10, 11:57 a.m.): Several subscribers have reported doing this trade, so I’ll track 16 calendar spreads @ 0.48. It is currently quoted at 0.34/0.51, but it’s not too early to try to roll the spread forward, buying back the short Feb 27s for as little as 0.04 while shorting the March 6 calls for as much as 0.16. Accordingly, I’ll advise selling the March 6/Feb 27 185 calendar spread for 0.10 or better, day order. This order will become easier to do if DIA continues to move higher. Obviously, though, a significant payoff will require quite a rally between now and March 27, when the long side of our position expires. In the meantime, we can continue to reduce the cost of the spread by shorting weekly options successively against the March 27 calls we’ll continue to hold. With DIA at higher prices, we’ll be looking to take in not a mere dime when doing the roll, but perhaps as much as 0.20-0.30. One way to estimate the maximum value of the spread is to check actual prices for at the-money options that expire this Friday. With DIA currently trading around 177.76, the Feb 13 178 calls are trading for 0.95. But how much will they be selling for this Friday with DIA slightly higher, trading at near the 178 strike. My guesstimate is about 1.00, so that would be the close to the maximum value of our spread with DIA at 185 come March 27. (That’s with the short side of our spread trading for zero. In practice, we might have to pay a few cents to cover the calls if DIA is trading for exactly 185, reducing the value of our spread correspondingly.) _______ UPDATE (February 22, 8:33 p.m.): The original spread is trading for 0.80., and you can either roll it by buying the Feb 13/Mar 13 185 calendar or simply close out the position for a profit of around $500. Whatever you do, please let me know in the chat room so that I can update guidance. You could also sell ten of the spreads to pay off the cost of the initial position and keep the remaining six spreads for a swing at the fences.
