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.
Trade Alert – (SPY)
Sell Short the S&P 500 SPDR (SPY) September, 2012 $137 Puts at $0.94 or best
expiration date: 9-21-2012
Portfolio weighting: 5%
($5,000/100/$1.60) = 11 Contracts
There is a risk that I am dead wrong in my expectation of a market selloff in September. Therefore, I want to protect my exiting position in the October $138 puts from a continued sideways, or move up, in the market. I intend to do this by converting my outright (SPY) $138 puts into a $137-$138 put spread. I will do this by selling short the S&P 500 SPDR (SPY) September, 2012 $137 Puts at $0.94 or best.
I want to keep my October $138 puts in place in case there is a sudden market shock that rapidly sends prices south, possibly through an overnight shock that creates a gap opening in our markets. This will offset any losses that I may suffer from my existing “RISK ON” positions in Apple and Gold.
Please also note that I am shorting September (SPY) puts against my long October (SPY) puts. This is known as a calendar spread, or a cylinder, and should reduce your margin requirement. This means that I will have limited downside participation until the September 21 expiration in 15 trading days, and unlimited participation after that.
If the September $137 puts expire out of the money, this will add (11 X $0.94 X 100) = $1,034, or 1.03% to your performance for the notional $100,000 model portfolio.
Please note that some IRA and 401k accounts won’t let you mismatch option maturities in this fashion because their risk systems are too simplistic. They treat the sale of the September options against Octobers as a naked outright short, as opposed to a hedged trade. This is idiotic, but that’s the way it is. If that is the case, then stand aside from this trade alert.