Trade Alert Correction – (SPY) July 31, 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.

Clarification of SPY option trades today, 7/31/12

The first SPY option order to sell the August $140 calls was cxld and replaced by the order to purchase the October $138 puts

Trade Alert – (SPY)

Buy the S&P 500 SPDR (SPY) October, 2012 $138 PUTS at $4.50 or best

Opening Trade


expiration date: 10-19-2012

Portfolio weighting: 5%

($5,000/100/$4.50) = 11 Contracts

I am willing to bet that the Federal Reserve will not launch a full on QE3 at the next open market committee meeting that starts tomorrow. At best, they will probably chip away at the margins, such as through expanding collateral requirements for “operation twist” to include mortgage backed securities, or eliminating interest payments to banks for deposits with the Fed. If that is the case, then you can expect a rapid sell off in the (SPX) of 50-80 points, or 5-8 points in the (SPY).

While the condition of the economy is poor, it is not bad enough to justify a further quantitative easing. In any case, round 3 is expected to produce little more than diminishing returns from such a strategy. And the Fed is loth to appear political. We are just too close to the November presidential election to embark on any bold moves.

We have just seen a dramatic 60-point move up in the (SPX) in only four trading days. If I am right, the (SPY) $138 puts will quickly double in value. If I am wrong, they will drop by half. But the long October expiration will probably give me a chance to get out at cost on any pullbacks. These options should maintain some time premium, no matter what the market does this week.

From a risk control point of move, the position will allow me to offset some risk in my remaining position in the short August (FXY) 127-130 call spread. This gets me close to a completely neutral position.