8/14 – testing the lows.

The market started up on OK PPI numbers. And then it lost footing and retested the lows. It did hit the up trend line and the Aug 10th low and then rebounded on low volume.


The market started up on OK PPI numbers. And then it lost footing and retested the lows. It did hit the up trend line and the Aug 10th low and then rebounded on low volume. I will also be watching the VIX in the next few days. The previous VIX high was 29.5. Will it double top? I think it may, in conjunction with the index charts at the bottom of this post. The market has many participants leaning short.
In the afternoon, lows are tested but on lighter than average volume. Is it time to put on a bullish strategy? Right now, I like my selling volatility and hedging strategies. It may satisfy my ego to guess direction correctly, but I am in this game for making $$ and exercising discipline.
The movement offered me an opportunity to adjust some positions. All the trades I put on yesterday have widened slightly, but are not yet at the point where I will take them off. However the time is approaching.
TOL – 3 units of Dec/Jan 20p (hedge) for .04. That makes for a nice balance in this trade. It Extends the Breakeven out to 17 and 31.90 on the upside. The Reward to risk is 24:1. The underlying is sitting right in the middle of the risk graph. Earnings are scheduled for Aug 22, which could be another reason for the Vol skew. I would like to get out of half of my positions prior to the announcement.
Just before the close I was filled on the 22.5p calendar for .15. This is just a test trade to see if it would trade that price. It did, I will start buying for .05 or less, and then scalp it for a profit prior to earnings. .15 represents of 130% return on my total risk, not bad for a night. But I think this should widen much more. I would like to see a 250% or greater return on this.
IVN – 1 unit 12.5 Dec/Jan Calendar for .02. I am trying to put more on.
CYGX – This is a penny stock I follow. The down move has been pretty severe. And at .24/share it is a playful little stock. I bought 1000 shares. Little risk, I am looking for a move back to the trend line .34. A 35% after commission increase. This can do it in a day. .23 is technical support from a few years back. There may be a nice short reversal.
I am looking for a reversal in the IWM @ 76.16. It was tested in the afternoon, and then came off the lows.
SPY. This is very interesting. This has been the second test of the 38.2% retracement on the Secondary Trendline (July ’06). If we blow through this in the morning, I am looking for a test of the 50% retracement of this trendline (138.97). Something tells me tomorrow morning open down, perhaps substantially and stops are hit. And then a strong rally through the day. We will see. I may turn short term bullish if the S&P goes over todays top (146.05). I know it is 30pts away, but if the longs get stopped out, they won’t be able to sell at 146.05. Hmmm.
SPY%20rebound.gif
IWM – Russell. Extremely interesting. Notice 2 things on this chart. 1st – The IWM bounced off of the 61.8% retracement and just below the Primary trendline. This provides a very interesting entry point. If we get a selloff in the morning, look for it to bounce on the Trendline @ 74.69. It may dip below that, but then you can set a stop @ 73.96. Technically this makes a ton of sense.
IWM%20Rebound.gif
With the high volatility, the best options are Bear Put Spreads, some type of wide butterfly. Or a Skewed Put Butterfly (I like it because you can profit 3 different ways).
For example, a Sept 74/73/71p (Buy/2xSell/Buy) butterfly gains about a .25 credit with the underlying @ 75. If the underlying continues to rip downward, the trader may loose .05 to .15 if he gets stopped out below 73.75.
However, if I am correct with the bounce:
* The Butterfly could remain out of the money and I keep the .25.
* The underlying can also decrease slowly and hit max profit @ 73 at Sept Expiration on Sept 21st.
* Or if the market rips higher, the trader can sell the 71p strike and buy the 72p strike and pay a very small debit (< .12), or sell the 74p and buy the 75p, while riding it up near 80, this would turn this into a bearish put butterfly for a credit.
With this strategy, and buying the spread @ .25, even if the trader is DEAD WRONG and he misses the stop exit and the IWM rips down to 73 right through all support. Each position 1/2/1 of this trade would loose about $6 + commission (roughly $6 per position each way). So if the trader unit/clip size is 10/20/10 in his butterfly. Max loss is $180. Max gain at 73 @ expiration is $1240. And if the IWM closes above 74, the trader earns the full $250, less $60 for entry commission.
However, if the IWM closes a strong bar (high volume) below 73.95, the trader would get out for an estimated $3 on the spread and $12 in commission. I am looking for the MKT to solidly test the 74 level, so I would be looking for a better price than .25, but we will see.
Those are my thoughts moving forward.

2 thoughts on “8/14 – testing the lows.”

  1. Jon,
    This makes some sense to me but I am so far below you in terms of chart knowledge, that I would have trouble trading this data on my own. I applaude you for your knowledge of option strategies. You’re my idol!!
    Love,
    Dad

  2. No Worries Dad,
    remember, I have been doing this “professionally” for 4 1/2 years now. I enjoy option trading much more with these multiple day time frames.
    When daytrading Treasury and Forex Futures I was having to recognize chart patterns many times per hour. In fact, I was following 20 different issues and marking highs and lows a few times every few minutes. Crazy.
    I like the ability to trade, then go on a bike/hike/golf and come back relaxed.
    Here is a funny side note. Yesterday, I had a Life Ins exam at the house. I had been trading all morning… My Blood Pressure was 110/70 and my heartbeat was 52. In the days of daytrading it would have been more like 145/90 and 80.
    Ahhh,
    j

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