Profit From A Closed Market

December 24, 2007

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Interesting, interesting! Just as the day came to a close some heavy buying pushed stocks higher and we were particularly intrigued by Google, which reached the $700 mark again. Those big round numbers are often perceived as psychological resistance or support levels and breaking above or below key levels can trigger a wave of programs to buy or sell. It bodes well for Google that it captured that key level and retained it as the day closed with heavy volume pushing the stock higher.

Citigroup also had a nice move up today, albeit earlier in the day. The stock has now found support at the $29.50 area on numerous occassions and leads us to believe that a January bull put might be a nice play as time-decay is particularly potent with the market closed so often during the holiday period. Even as the markets are closed, time-decay will work away on eroding premium so what could be a greater present this holiday season for yourself than knowing that you are making money even as the markets are closed.

Retail also had a good day and it was nice to see JC Penney rise substantially on a late Santa Claus rally. JC Penney was up $2.00 for the day, which equated to a whopping 4.56% move.

Last week we mentioned a Ratio Put Backspread on Research In Motion (RIMM) that produced a very nice profit in just one day. We received a question on how one could now trade this stock since it has gapped higher. Given RIMM’s meteoric rise after its earnings report, a credit put spread might work quite well given that it could profit if the stock were to continue rising, stay flat or retrace some of its gains (but not go lower than the short put strike price).

RIMM gapped from $105 to $120 last Friday. Today, RIMM traded in a tight range from $119 to $117. The last price RIMM traded at before gapping higher was the $105 mark, which should act as a line of defense and offer support. The 20 and 50-day EMAs also reside close to the $105 level, further supporting the technical argument that $105 will be a "line in the sand". If $105 is broken, $100 would likely be the next support level for RIMM (which it held for about 3 weeks despite a Piper Jaffray downgrade). The beauty of a Bull Put spread is the trader does not have to be exact in the prediction of where the stock may trend in the short-term, however it appears technically unlikely that RIMM will trend below $105 by January and, since its recent move up was based on a strong earnings report, it would be surprising to find a fundamental argument that sharply counteracts the technical expectation that RIMM will remain above this level.

With all that said a relatively conservative bull put spread involves:

Jan08 $105 Short Put = $1.92 Credit

Jan08 $100 Long Put = $1.17 Debit

Net Credit = $0.75, Risk = $4.25.

17% Return On Risk in 24 days

Some might not be big fans of the risk/reward ratio in these credit spreads and that is understandable. However, the reason the reward is lower than the risk is the stock would have to close its recent gap for the trade to run into trouble and even if it did start trending lower there is plenty of time to make changes to the trade which is what we specialize in.

So, as you enjoy the festivities this holiday season don’t forget those credit spreads that can take advantage of time-decay and make you a little money!