Archive for October, 2009

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Sell an ITM Call and an ITM Put usually equidistant from price.  The trade is done for a credit.  In order to be profitable the trader needs the stock to remain stagnant and between the short options.  The maximum reward is the credit and the maximum risk is unlimited to the upside and to zero on the downside.  The breakevens are the Short Call strike less the credit to the downside and the Short Put strike price plus the credit to the upside.  Review the risk graph and you should gain understanding of the risk and reward of the trade. Best, Robin

ECONOMIC REPORTS

MONDAY 10/26

None

TUESDAY 10/27

Durable Orders,  Durable Orders ex Transportation, Case-Shiller 20-City Home Index, Consumer Confidence

WEDNESDAY 10/28

New Home Sales, Crude Inventories

THURSDAY 10/29

Chain Deflator – Adv., GDP – Adv., Initial Claims, Continuing Claims

FRIDAY 10/30

Personal Income, Personal Spending, PCE Prices, Core PCE Prices, Chicago PMI, Michigan Sentiment-Rev, Employment Cost Index

 

 

EARNINGS OF NOTE

MONDAY 10/26

ALY, GLW, NOV, PPD, RSH, SOHU, MHP, VZ, WINN

TUESDAY 10/27

AKS, APOL, BIDU, BYD, BWLD, CAB, CP, CRDN, DAI, DV, ETFC, ELNK, HMC, JCI, LCAV, MEE, NTRI, PNRA, PEET, RFMD, TUES, UA, X, VLO, VCLK, V, WDR, WYNN

WEDNESDAY 10/28

 AFL, AKAM, BWA, CERN, COP, ESRX, FSLR, FLS, GD, GSK, GT, IP, JNY, LVLT, OC, Q, SYMC, TZOO, UIS, WLP, WYN

 

THURSDAY 10/29

AET, APA, BLL, BC, BBW, BKC, ELY, CME, CL, DENN, DB, EK, EXPE, XOM, GNW, HIT, K, MTW, MFE, MET, MHK, MWW, MORN, NBL, ODP, OMX, PG, SHAW, SNA, S, STRA, BCO, WM, WMB, XEL

FRIDAY 10/30

ACI, CVX, CMI, PC, SNY, SPG, SNE, EL, WPO, WY

Most traders don’t understand spread trading.  They think that placing a bullish instrument simultaneous to placing a bearish instrument is at cross purposes to each other.  Why not go long if bullish and short if bearish and forget paying the extra commissions.

There is a method to our madness when spread trading.  It has to do with 1) Limiting Risk and 2) Reducing Volatility.  Let’s say that we agree that the market is heading higher and my friend “Directional Dave” buys a Long Call to optimize the trend.  However, there are a million other traders that are thinking and doing the same thing.  As a result, supply and demand does its thing and as demand increases for that Long Call, the price is pumped up (volatility).  Our friend “Directional Dave” is now paying a premium for that call.  As a holder of an option, one must be concerned about time decay and implied volatility.  Dave’s Long Call is a wasting asset and as each day passes the option is losing value and is also susceptible to changes in implied volatility.

The bottom line is that our friend Dave is the owner of an asset that can easily devalue even if he gets the direction right.  Enter “Sammy Spreadtrader”.  Sammy also feels that the market is rising, but he also realizes the pot holes in the road to riches and decides to “spread off” some of the risk of the Long Call.  Sammy sells a call one strike price higher than the Long Call and takes advantage of the increased demand and volatility of the pumped up options and collects premium to offset the cost of the Long Call.  The result is a position that reduces the risk of the trade and still allows for a very attractive potential return.

“Directional Dave” now sees an opportunity to sell premium.  He is beginning the see the light.  Dave assesses the market and determines that the underlying stock is neutral to bullish.  Not the absolute best scenario for a Long Call because he needs movement to consider a long option.  Dave realizes that money can be made by selling a Naked Put.  Good job Dave, you’re getting the hang of it.

Sammy steps in and also recognizes the opportunity but takes a much more prudent approach and buys a Put beneath the Short Put in order to limit the downside risk.

So you see, it doesn’t take that much more to become a spread trader.  That additional option instrument can make the difference between blowing up your account and being consistently profitable.  To the outside observer, spread trading does seem a bit incongruous.  However, those of us who know the craft are putting money in our pockets and doing it without stress.  Best, Robin

 The DOW moved through the recent swing high at 9918 from 9/23 to challenge significant resistance from the relatively flat market action from 2004 (see 20 year monthly chart).  There is also very stout resistance from 5/1999 through 6/2001.  The next 1000 points on the upside in the Dow will be difficult to achieve due to the large amount of trading activity at these levels.  The Short term chart reveals that the index moved up to the top end of the Broadening Bullish Trendline Channel that was pointed out last week.  Friday’s action printed an almost perfect bearish engulfing pattern on increased volume which bodes for a move back down to recent support levels.  Support resides at 9918, 9834, 9496 and 9430.  The 50 SMA may also act as support at around 9550 if and when the index gets there.

The SPX is testing the “shelf” from 2004 as well as the swing low from March 2001 (see 20 year monthly chart).  The index moved up close  to testing the upper trend Line from last week’s chart and very close to my projected move to 1080. The index formed in a bearish candle on increased volume.  We are likely going down to test support at the swing high from 9/23 at 1080 and the gap from 10/13-14.  The next downside target is at 1040 and then 1020.

The COMPQ is displaying some weakness at this level putting in two narrow range trading days followed by a “Hanging Man” candlestick.  Look for a small pullback or at best some sideways trading this week.  Some major tech companies are reporting this week beginning with AAPL on Monday.  If the reports are favorable it may negate what the charts are showing us now and push higher.  Follow the market but stay hedged.  Support resides at 2143, 2128, 2085, 2059 and 2040.  The 50 SMA may also provide support at 2050 if and when the index gets there.

 

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-The Call Ratio is nothing more than a Bull Call with an extra Short Call usually at the strike price of the Short Call in the Bull Call.  Example:  BTO one Long Call at 25 and STO two Calls at 30.  The maximum reward is achieved if the stock settles at the short call strike.  The trade can be place at a debit or a credit.  If the stock settles between the long and short strikes, the profit is reduced and the break even is the Long Call strike plus the debit (if placed for a debit).  If place for a credit, the trade will make a small profit wherever it settles below the upside breakeven.

The upside profit begins to diminish the further the stock rises above the Short Call strike.  The Short Calls will cost more to close as the stock rises which is detrimental to the seller of the calls, so even though the 25 Long Call is increasing in value, the Short Calls are losing faster that the Long Call is gaining.  At expiration, when the Stock rises beyond the amount of the Short Call premium collected, the position begins to lose.  Because there is one call uncovered, the trader must post margin on the trade.

ECONOMIC REPORTS

MONDAY 10/19

None

TUESDAY 10/20

Building Permits, Core PPI, Housing Starts, PPI

WEDNESDAY 10/21

Crude Inventories, Fed’s Beige Book

THURSDAY 10/22

Initial Claims, Continuing Claims, Leading Indicators, FHFA Housing Price Index

FRIDAY 10/23

Existing Home Sales

 

 

EARNINGS OF NOTE

MONDAY 10/19

AAPL, BSX, BRO, GCI, HAS, JEF, STLD, TXN

TUESDAY 10/20

BLK, EAT, CNI, CAT, COH, CREE, DD, GILD, ISRG, OXPS, PH, BTU, PFE, SNDK, STX, SHW, STT, SYK, SVU, KO, TUP, UAUA, UTX, UNH, WLT, WU, YHOO

WEDNESDAY 10/21

 ATI, MO, AMP, AMGN, AMR, CTXS, EBAY, LLY, EFX, FLIR, FCX, GENZ, HCBK, KEY, KMP, NITE, LRCX, NVLS, OSIP, QLGC, BA, USB, WFC

 

THURSDAY 10/22

MMM, ALK, AMZN, AXP, T, BDK, BGG, BMY, BRCM, BUCY, BG, BNI, COF, CMG, CB, CNX, CS, DAL, DO, FITB, ESI, JNS, JBLU, JNPR, KMB, LM, MCD, MRK, NCR, NFLX, NVS, OXY, PM, PNC, POT, RTN, RS, R, SGP, HOT, SPWRA, TRA, CAKE, DOW, HSY, NYT, TRV, UNP, UPS, LCC, WYE, XRX, ZMH

FRIDAY 10/23

FO, HON, MSFT, SLB, WHR