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Buy the S&P 500 ETF (SPY) February, 2012 $125 puts at $5.52 or best
12-2-2011 – 11:00 am EST
5% portfolio weighting
expiration date: 2-19-2012
($5,000/100/$5.52) = 9 contracts
Since the fall rally in stock markets began on October 4, my target for the S&P 500 has been the 200 day moving average, now at 1,265. We hit that this morning in the (SPY), so I am going to start nibbling on the short side.
It took a lot to get us up here so fast: a blistering November nonfarm payroll, great black Friday and Monday figures, positive noises from the European authorities, a back off in Italian and Spanish bond yields, and the usual seasonal year end window dressing push. My experience tells me that when good news bunches up like this, it creates an asymmetric trading opportunity. The short term downside risks are now greater than the upside for the first time in two months.
The best way to play this is with a medium term dated option with an expiration out three months. That’s why I have shifted my focus to the February series, which see us through the usual holiday bleed off in volatility.
My target here is not too ambitious. I am looking for the market to give up half its recent gain, which would take the (SPY) down to $121, just north of a major support level at $120 clearly visible on the chart below.
If I am right, this would take the S&P 500 ETF (SPY) February, 2012 $125 puts from my cost of $5.52 to $8.60, a gain of 56%. Catching any piece of that in this incredibly difficult trading environment would be worthwhile.
If the parade of good news continues, a distinct possibility, and the S&P 500 claws its way all the way back up to $1,325-$1,350, I’ll double up on the position. I am confident that we will get a profitably exit point for a higher average price by the February 19 expiration.
Have a nice weekend.