Follow Up – (SPY) October 8, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Explanation to Previous Trade:

Trade Alert -(SPY)

Buy the SPDR S&P 500 (SPY) November, 2012 $150-$155 deep-in-the-money bear put Spread at $4.38 or best

Opening Trade


expiration date: 11-16-2012

Portfolio weighting: 10%

Number of Contracts = ($10,000/100/$4.38) = 23

It is clear that the equity markets are losing their upside momentum. The lead market, the NASDAQ, is threatening a breakdown. Apple (AAPL) has already done so, piercing its 50 day moving average this morning. (AAPL) also has an ominous “head and shoulders” formation in place, meaning that an intermediate term top is in.

But with Ben Bernanke’s QE3 safety net so close below I don’t thing we are going to crash either. That leaves my sideways chop scenario the most likely. You can also expect traders to go catatonic waiting for Q3 earnings reports to come out over the next four weeks.

So I am going to take some premium in here through buying the SPDR S&P 500 (SPY) November, 2012 $150-$155 deep-in-the-money bear put spread at $4.38 or best. This is a bet that the (SPY) will not break out to a new high and rise above $150 by the November 16, 2012 expiration.

That is 4.5 points, or 3.1% higher than here. This trade will reach its maximum point of profitability in the market goes up small, sideways or down for the next five weeks. It also has a short volatility element to it, as have all of my Trade Alerts for the past five months. When markets go to sleep, this is the trade you want to have on.

The salient features of this trade are the following:

*It is deep out-of-the-money
*It is small
*It is short dated

That way if the markets suddenly get another steroid shot from the world’s central banks and the wheels suddenly fall off we can cover quickly at a small loss.

The other benefit of this trade is that it is decidedly “RISK OFF”, and therefore can be used to hedge, or limit the potential downside losses in my substantial “RISK ON” holdings in (GLD), (SLV), and (GOOG). I will try to flatten out risk in the portfolio as other “RISK OFF” entry points present themselves with short positions in oil (USO), the euro (FXE), and the Australian dollar (FXA).

The markets aren’t going into a 20-year ”Rip Van Winkle” type snore. I expect volatility to pick up again after the November 7 election. Hence, my November expiration.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.

The same applies if, for any reason, you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.

Keep in mind that these are ball park prices only. Spread pricing can be very volatile on expiration months farther out. These are the trades you should execute:

Buy 23 November, 2012 (SPY) $155 Puts at……………$9.60
Sell Short 23 November, 2012 (SPY) $150 Puts at…….$5.22
Net Cost:……………………………….………...……....$4.38

Maximum potential profit at expiration:
$5.00 - $4.38 = $0.62

($0.62 X 100 X 23) = $1,426 – 1.43% for the notional $100,000 model portfolio.