Are the Bulls Running Out of Bullets? Part Dos

The stock market has been choppy here as the bulls and bears continue to “duke it out.” While I am excited about the downside prospects, and catching that downside with strategic put option positions, I don’t think we are ready for a decline just yet. For now, I’m not buying put options on the SPY – but I’m looking for signals to do just that.

In the meantime, people are nervous, and this is generating decent premiums on the weekly SPX options. We can sell these options for this week’s expiration that are 1 standard deviation out, and sit back and collect this premium while the market is figuring out when it wants to make its move.

The trade I’m taking is as follows:

The SPX cash index is currently trading at 1418.50. A 1 standard deviation going into Friday, December 14, is 27 points. This means we can sell the SPX weekly 1445 call (and buy the 1450 as protection) and also sell the 1390 put (while buying the 1385 as protection) as an Iron Condor, for a net credit of 1.00. As long as the stock market stays between these two levels heading into next week, we can collect maximum profit on this trade.

I’m a big fan of both directional trades as well as utilizing the power of premium decay. During times of uncertainty, when the markets can’t decide exactly what they want to do and when they want to do it, I favor spreads and iron condors. Once the markets settle into a routine, then I’ll also attack it with directional trades. This creates what I call the “EKG” equity curve – a steady upward trendline with the occasional “blip” from the successful directional trades. We’ll be ready for some big directional trades in the next few weeks. Stay tuned.

Good Trading,

John Carter


Editors Note: Part One of John’s series is easy to find. On the right side of the Community page look for a list of authors (labels). Click on “Next” and John Carter’s name appears. Click on his name and you can see all of his posts. Enjoy.