Dear Volatility Trader Member,
The major stock indexes are at all-time highs – and the yield curve is at the most inverted point that it’s been since the end or 2000.
You can call it a dichotomy if you like. I call it dangerous.
At present, I still feel this market is significantly too overbought to support the fundamentals behind the present economy, and that a sharp selloff is going to catch the giddy bulls by surprise.
At the same time, however, it can be frustrating to not be “market long.” So we’ll implement a two-part option position designed to make money – no matter whether the S&P 500 goes up, or down.
Here’s what we’re going to d
Buy the SPY December 2006 138 puts (SFB-XH) for no more than $0.80.
Buy the SPY March 2007 146 calls (SFB-CP) for no more than $1.50.
This is a two-part position, so please implement both sides of the trade.
The reason we’re doing this is because I expect the market to dip, but then rally after a pullback has taken place. And come New Year, we could easily see new highs. So the puts protect us from a short-term decline, while the calls will let us benefit from a rally in the first quarter of 2007 – especially if the Fed lowers interest rates.
It’s more than likely that the S&P 500 will take a nosedive in December, and we’ll see the puts gain in value.
As you can see from the chart below, we’re right at the very top of the short-term range. The point & figure chart does a good job of taking out the “noise” so we can see the pure movement of the index. Our initial pullback target on the downside is in the 132 area.
Should the correction occur, we won’t sell the call side of our trade, even if it loses value. Instead, we’ll close the put side, locking in the profits. At that point, our March calls will be paid for in cash, essentially making the trade free at that point. Any upward movement in the first quarter of 2007 will be pure profit.
As and you can see from the monthly chart of the S&P 500, the index has considerable room to run to the upside, with our initial longer-term target in the 1,600 area.
Portfolio Update
FuelCell (FCL)
Symbol
Entry Date
Price Purchased
December 2006 $5 calls
FQG-LA
11/7/2006
$1.75
The December Fuelcell Energy calls are moving along nicely. At last glance, they’re trading at $2.20 – almost 26% above our entry price. Hang on!
Equity Office Properties (EOP)
Symbol
Entry Date
Price Purchased
December 2006 $40 puts (sold half the position)
EOP-XH
11/2/2006
$0.35
The December EUP puts are currently trading at $0.05 cents on the bid. I know the position looks a bit dismal… but hang in there. The REIT sector is way overvalued fundamentally, and I think this trade still has the potential to spring a big surprise when we least expect it. When the sell off really gets started in the sector, many of the stocks could easily be chopped by one-third… virtually overnight.
CBOE Volatility Index (VIX)
Symbol
Entry Date
Price Purchased
November 06 10 calls
VIX-KB
10/23/2006
$2.10
The November VIX options have expired. I cannot help to feel that the VIX is on the verge of a HUGE spike up… and I would like to implement another call position, but I am going to wait for a day or two to see what shakes out.
St. Paul Travelers Companies (STA)
Symbol
Entry Date
Entry Price
Dec 2006 $50 puts
STA-XJ
11/10/2006
$0.30
At last glance, the STA December puts were trading at $0.35 and are headed in the right direction. A break below the $51.50 area should bring this stock under $50, and will result in a significant win for us. I’ll be giving you daily updates on this position until we close it.
Exit is everything,
Mark Whistler
