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Friday, March 29, 2024

Trendless Tuesday – Stuck at the Market Top

2,480! 

That was our shorting line last Tuesday and here we are (still) again on the S&P and waiting for SOMETHING to happen.  Volume on the S&P ETF (SPY) was only 26.8M, the lowest Monday reading of the year and less than 1/2 of Friday's volume.  Where have all the traders gone?  

How are we going to punch up through 2,500 if we can't even hold 2,480?  The Dow is a joke of an index (22,050 on /YM), so we don't count that and the Nasdaq (/NQ) is having trouble at 5,950 in the Futures while the Russell (/TF) was also a short at 1,430 last week and today they are struggling to hold 1,411 – another bad sign.  On the SPY ETF, you can see the volume melting away as we struggle along the $248 line.

 We've been talking about hedges and a good way to hedge the S&P, other than simply shorting /ES Futures with tight stops above, is a bear put spread on SPY options, which we can accomplish with the following:

  • Buy 20 SPY Sept $247 puts for $2.50 ($5,000) 
  • Sell 20 SPY Sept $242 puts for $1.35 ($2,700) 
  • Sell 5 TEVA 2019 $20 puts for $4.40 ($2,200) 

That spread is net $100 and pays $5,000 (up 4,900%) if the S&P drops below 2,420 (2.5%) into Sept expirations.  You have an obligation to buy 500 shares of TEVA for $20 ($10,000), but that's a stock we really love at this price so, essentially, free money for promising to buy it.  Ordinary margin on the short puts is just $900, so it's a very margin-efficient way to raise cash but you can use any stock you REALLY want to own as an offset.  

That covers us through some August uncertainty without risking very much (other than owning TEVA) and it's one of the main ways we like to hedge for the short-term.  It's much less aggressive than our longer-term ultra-short ETF long spreads, those provide the bulwark of the protections for our long-term positions.

For those comfortable playing the futures, however, nothing beats a straight-up bet on the indexes as long as they are below the above levels as we can get out of them quickly with fast profits on the occasional dips our indexes are prone to take, but don't seem to last very long. 

Notice we only hit 2,480 the one time on the 27th and quickly dropped back to 2,460 (a $1,000 gain on the drop) but, since then, we've generally ranged from 2,475 to 2,465 ($500) with more frequent moves from 2,475 to 2,470 ($250).  With Futures trading, it's better to get in and out with a quick profit several times than wait for one big move.  Once we see a top established, we can play it over and over again – until it breaks – then we need the good sense to get out.

I'm getting out today – I'll be taking the morning off and back in the afternoon.

No webinar this week as I'm on a cruise, but I don't think I'll miss much – other than a bit of a pullback we're well-prepared for.

Later, 

– Phil

 

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