Diamonds

We bought two May 108 puts for 0.86 -- two cents above their intraday low -- off a limit order, then sold one later in the morning for 1.26.  We'll hold onto the put (or puts, if you initiated the order in larger size) for now, using an adjusted cost basis of 0.46.   If stocks continue lower, I plan to short-sell a put at the 103 strike for at least as much as we paid for the May 108, but at the moment, it appears the exchange has not listed any May strikes below 107. _______ UPDATE 3:13 p.m. EST):  Use a 0.96 stop-loss to exit the put (they have traded no lower than 0.97 so far today).  In theory, this will preserve a profit of $50 per contract on yet another unsuccessful attempt to pick  The Top.

Harry has reminded me that the 11156 target given in today's Dow Industrials tout has a DIA equivalent at 111.50 that was flagged here a month ago (the original target was slightly higher).  So that we can at least have a horse in the race, let's plan on buying two May 108 puts.  Use a lowball bid of 0.76 in the first five minutes, but thereafter you can pay up to 0.86. _______ UPDATE (11:13 a.m. EST):   DIA has fallen sharplyb ut not before it head-faked in the early going, allowing our puts to trade down to 0.84.  We'll record them as having been bought for 0.86, a price that would have been available to anyone who attempted this trade. They are currentl 1.20 bid, so I'll suggest taking profits on half the position now.

Let's add the Dow Industrials to the list of major stock indices that we would like to short.  This can be done using a midpoint pivot of 111.50 from the weekly Diamonds chart.  We recommend selling at 111.37 with a stop at 111.77, risking $40 per 100 shares traded.  The equivalent of the pivot in the June Dow futures contract is estimated to be 11087.  (Posted by Doug McLagan) ________ UPDATE (2:40 a.m. EST, March 31):  In reconsidering the risk/reward characteristics of this trade, we have decided to cancel the recommendation.  Should the target be reached, however, traders should be alert to hidden pivot-based opportunities to get short if a reversal there appears to be underway.  For the Dow Jones Industrial Average, the midpoint is at 11156.44. 11156.440

A moderately important rally target at 107.58 is not likely to produce the Mother of All Tops, but it does look like a high-odds shorting opportunity because of its subtlety and the single-bar delicacy of its ABC coordinates (180m, A=97.94, 11/04; B=103.62, 11/11).   Accordingly, I'll recommend buying two February 107 puts (DIANC) if and when the target is closely approached.  A rough estimate of their value with the underlying at 107.58 is 1.80.  I did not use a calculator to come up with that number, by the way;  rather, I took the current, 1.93 bid for the February 106 puts and reduced it by 12 cents, based on delta value of 0.45 and a 30-cent rally to 106.58. _______ UPDATE:  The Diamonds plunged at the opening bell, so our short went unfilled.

The rally pattern shown in the accompanying chart looks promising for a short at 105.86.  The C-D leg has been a tedious grind relative to the quick ABC, but it doesn't alter the logic or the odds of the 105.86 target eventually being reached. Officially we'll buy two January 106 puts (DIAMB), stop 106.01.

I have a hankering to take something short over the weekend, but if you agree, you'll do better picking your own spot on-the-fly rather than using mine based on a Thursday-night guesstimate. Nevertheless,  if the Diamonds rally on the opening without having exceeded yesterday's 103.59 low, you should take your shot at 104.86, a midpoint pivot. So that you can adjust if opening-bell weakness obtains, I have included a chart that shows the relevant pattern. ______ UPDATE (104.17): A head-fake on the opening to 105.27 was shortable, although the modest selloff that followed over the next few days would not have produced much in the way of gains. 

Let's use a 105.45 rally target to get short. December 105 puts (DIAXA) would be a decent buy for around 1.57 at that time if you want to use a limit order, but that's just a guesstimate, and because there is risk that you could miss the trade, I'll make the order catch-as-catch-can (as opposed to a Pick of the Day that could be executed on autopilot).  Officially, we'll buy four Dec 105 puts if DIA rallies to 105.42.  A 105.61 stop-loss is suggested. _______ UPDATE: DIA went no higher than 104.98 before diving, so we did nothing on the order (which you should cancel).

There's a promising Hidden Pivot resistance at 101.79 where we can attempt to get short. Buy two December 100 puts (DIAXV) if the stock rallies to within three cents of the target, and place a stop-loss at 102.01.  I estimate that the puts will be trading for around 2.45-2.50, if you want to use a limit order. ______ UPDATE: The Diamonds never got higher than 101.20 on the last thrust, so we'll scrap the offer.

Our short offer at 101.82 got stranded despite an encouraging short-squeeze on the opening. The Diamonds never got any higher than 101.20, and because they fell so hard into the close, we're likely to have plenty of company if we continue to look for a short entry. Let's give it a day and see if option volatilities continue to climb out of sight.