Archive for September, 2009

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This trade is set up as a credit spread just as last week’s example of the OTM Call Diagonal.  The Short Put is placed in the front month near the money and the Long Put in the next month one to two strikes below the Short Put.  It is a diagonal because it is a two legged position in different months and different strikes.  The trade will profit anywhere above the breakeven of the near month Short Put plus the credit from the spread and possible Long Put appreciation. 

 The trade begins to lose rapidly as the underlying moves below the Short Put strike price.  Volatility crush on the back month Put can also reduce the breakeven point below the Short Put strike price, so it is best to pay attention to the implied volatility of the Long Put when implementing the trade.  The fact that the Long Put is further OTM should mitigate some of that risk because Vega is less.  Review the risk graph and you should gain understanding of the risk and reward associated with this trade.  Best,  Robin

ECONOMIC REPORTS

MONDAY 9/21

Leading Indicators

TUESDAY 9/22

FHFA US Housing Price Index

WEDNESDAY 9/23

Crude Inventories, FOMC Rate Decision

THURSDAY 9/24

Initial Claims, Continuing Claims, Existing Home Sales

FRIDAY 9/25

Durable Orders, Durables, ex Transportation, Michigan Sentiment – Rev, New Home Sales

 

 

EARNINGS OF NOTE

MONDAY 9/21

LEN

TUESDAY 9/22

KMX, CCL, CAG, RAIL

WEDNESDAY 9/23

 AZO, BBBY, CTAS, GIS, RHT

THURSDAY 9/24

AM, RIMM, RAD, SCS, MTN

FRIDAY 9/25

AZZ, KBH

COMMENTARY: Profit from Patience

Our methodology at www.markettamer.com allows the trader to reposition trades gone badly so that you can optimize the new trend.  The question asked many times is “When and what is a new trend?”  The evaluation of what constitutes a trend change is somewhat discretionary.  So, I have put together a few tips to help you to determine when an adjustment may be considered.

1. When a break and close above/below major areas of support/resistance on strong volume.
2. Support and resistance are most significant when there is a confluence of indicators such as trend lines, major moving averages, Fibonacci levels, chart patterns and candlestick patterns.
3. Be patient.  If you are in too big of a hurry to adjust it can end up being detrimental to your position.  If you are patient and wait for confirmation on the move prior to taking action, you will generally be better off.  For instance, you may have a stock that is going down hard but has not yet closed below support and you begin to panic and add debit to the trade by buying Puts only to see the stock retrace yielding a loss on the adjustment.
4. Don’t adjust until the last 15-20 minutes of the trading session.  By doing so, you will be relatively sure that the trading day will close above/below your predetermined area of resistance/support and you are much less likely to be whipsawed.
5. Assess the risk and reward of the contemplated adjustment.  For example, if you buy Puts to protect a bearish move and other support resides just below the initial level of broken support, the room for the stock to continue its downward move has diminished and the cost of purchasing the Puts may not be justified by the potential risk/reward.
6. The presence of strong volume on a move through support/resistance is crucial.  Volume is analogous to the fuel that drives your car.  You may cross the finish line and get to your destination but your may not have enough fuel to get to the next town.  If volume is high, that is the same as having a full tank of gas and the ability to continue the directional move with momentum.

The market will try to “Shake You Out” of your position and force you to make unwarranted, premature adjustments.  If you practice patience, you will profit. Best, Robin

The DOW is at an inflection point with some fairly strong resistance.  The index is likely to move back down into the trading range this week.  We moved up as I suggested would happen as indicated in my post from last week.  My target was 9630 and we had a closing high of 9627 on Thursday 9/10.  I felt we had a chance to break above 9630 but it was not to be.  It was a shortened trading week after the Labor Day holiday and I expected more volume than what we got.  There doesn’t seem to be more conviction to drive the market higher at the moment.  I expect that we may be range bound for the short term.  The range is 9253 to 9650.  Should the index break below 9253 I will begin to lighten up on my long positions and then look to 9117 as a key area of support.

 The SPX finished the week at 1042 and my post from 9/5 projected a finish at 1039.  The index printed a Spinning Top and a Bearish Harami to close the week.  I feel that we will trade back down into the recent trading range in the near term.  We need more market participation in order to drive the index above recent highs.  Look for 1044-48 on the upside as immediate resistance and 1016 and 992 as support on the downside.

As has consistently been the case since the March lows, the COMPQ has outperformed the DOW and the SPX and been the leader.  This week has not been an exception.  I called for a bullish move this past week and felt that the index would challenge the recent high at 2059.  The COMPQ exceeded that level to finish the week at 2081.  Friday formed a Spinning Top/Bearish Harami and as a consequence we could see some bearish activity in the beginning of the coming week.  I am not sure that it will be anything more than a brief respite.  We will just see how it plays out.  Look for the upside resistance to be 2089 and then 2211.   The downside support resides at 2059, 1993 and 1958. 

 

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-This trade is set up as a credit spread with the short call in the near month closer to the money and a long call the next month out usually one to two strikes above the short call.  The trade is a diagonal because it is a two legged position with the options at different strikes and different expiration months.  The trade will profit anywhere below the breakeven of the near month short call plus the credit from the spread  and possible long call appreciation.  Volatility crush on the back month call will reduce the breakeven point above the short call strike price so it is best to pay attention to the implied volatility of the long call when setting up the trade.  The fact that the back month call is further OTM should mitigate some of that risk because the Vega is less.  Review the risk graph and you should gain further understanding of the risk and reward of the strategy.  Best, Robin