Email – #410

As I wrote yesterday, the market was likely to respond negatively after a positive start. It failed to through key resistance levels and even managed to give up all of its early gains. This inability to break out of its recent trading range is not encouraging for the short term. For the long term, I am unconcerned and we are well served being in two-year LEAPS for the most part.

However, as a measure of insurance – and to potentially make some money from this continuing downturn – we are going to engage a bear spread. As I explained yesterday, the purpose of a spread is to reduce our cost compared to a straight play. It also limits our upside. But that upside limitation is based upon where I think the index will go.

We are going to use the Powershares QQQ Trust (Nasdaq: QQQQ) as a proxy since it has fairly strong correlation to the S&P right now. It is also a “cheaper” way to engage the spread. We will also use an 11-month time frame, going out to next January. Most likely we will cover sooner than that if the market continues its slide.

Here is what you should d

BUY the Powershares QQQ Trust (Nasdaq: QQQQ) January 2009 $43 PUT LEAP (OZC-MQ), currently trading for $4.15. Against this position, SELL the QQQQ January 2009 $39 PUT LEAP (OZC-MM), currently trading for $2.60. Your cost for this trade will be approximately $1.55 with an upside of $4 (the spread between $43 and $39). If the QQQQ trade down to $39, it would represent down move of more than 30% from the highs – a very strong correction historically speaking.

Your maximum exposure in this trade, based on current prices, is $1.55 per spread if you hold until maturity. We may have the opportunity to trade out of the position earlier if the market does indeed head lower. When you get this alert, the prices will likely be different because of the fast moving market. DO NOT PAY MORE THAN $1.60 for this spread – remember the QQQQ options trade in penny increments.

There are many catalysts that could affect the market positively and negatively in the weeks ahead. More Fed cuts are quite likely as a more blow-ups in the financial sector. But one fact remains unquestioned and that is the continued stimuli being applied to the economy. This stimuli will have an impact toward the end of the year. But until we get there, volatility will be quite high… allowing us some opportunities to trade on the short and long side.

If you need help with this trade or need a broker that can execute spreads for you at extremely competitive rates for 400 Report members, contact Greg Long at GunnAllen Financial at 1.800.329.1984. If you do not have the ability or authority to execute spreads, skip this trade and get the necessary approvals to engage in spread trades. They can be an extremely cost effective way to benefit from market moves by lowering your outlay in many cases and in some cases spread trade can allow you to take ALL of your money off the table while enjoying strong upside potential.

We will use the 1886 level on the Nasdaq as our stop loss point, meaning that if we close above that important resistance level I will issue instruction to cover. But, until we break that level we will still be in the midst of a technical downtrend.

Karim