As many readers of this site know all too well I have been a bit bearish since the official launch of RiskReversal almost 3 weeks ago. While many of my trade ideas focused on single stock stories (bearish or bullish) have worked just fine, my overall market call has been a bit too bearish. Since the March 16 bottom I have been of the mindset that the sell off we saw did not demonstrate the sort of panic that is customary of a bottom, there was no capitulation. And given what I see as a plethora of headwinds, not just for the markets but for a relatively peaceful world :), the March sell-off was just all too orderly.
My strong view is that the markets are under-pricing certain geopolitical risks and the potential affects on the global recovery and thus the markets. For instance, why would investors buy gold and push it to all time highs, buy oil and push to multi-year highs and push the $ vs the Euro to levels not seen for 18 months if there were not worries, yet the equity markets world wide are making new multi-year highs. The central banks the world over are tightening their monetary policies and we will too, maybe not officially raising rates but certainly ending QE2 in June, and if the U.S. markets don’t sell off on this, even for a short while, then they may never sell off again (just kidding).
-Chart below shows massive under-performance of the EWZ and FXI since the start of the bull run in the SPX on Sept 1, 2010, shortly after our Fed signaled the start of QE, and while Brazil and China were knee deep in tightening measures to fend off inflation. This under-performance has since abated, and maybe we enter a similar phase as China and Brazil out perform the US as they have orchestrated a soft landing??
Why will it be different for us? I am not so sure it will be, but for now it looks like nothing will derail this rally and I want to look for a low premium way to get some overall long market exposure.
Listen, the bearishness is not because I am a doom and gloom guy. I really thought we would see a test of the 1250 level in the SPX and once that happened and put a little panic in the markets than we could continue the Bull run.
SO WHAT TO DO NOW?? I want to continue to pick on bad single stock stories, especially into earnings for the next few weeks, but I also what to cover my butt, because unfortunately for some of my long vol and bearish macro views, there is a definite potential for a blow off here. But as stated above, I don’t exactly want to commit a lot of long premium to make this bet as I really want to be Wrong!
TRADE: SPY (ref 133.32) BUY the JUNE quarterly (expires June 30th) 136 / 138 / 140 Call ButterFly for ~.30
-Buy 1 Jun qrtly 136 Call for 2.64
-Sell 2 Jun qrtly 138 Calls for a total of 3.46 (1.73 each)
-Buy 1 Jun qrtly 140 Call for 1.12
Break-Evens on June 30th Expiration: [136 lose .30, 138 make 1.70 and 140 lose .30]
Upside:
-stock btwn 136 and 136.30 lose up to .30,
-stock btwn 136.30 and 138 make up to 1.70,
-stock at 138 make 1.70.
-stock btwn 138 and 140 payout trails off
-stock 140 or higher lose .30
Downside:
-Stock below 136 you lose .30 premium
TRADE RATIONALE: Low premium, mildly low conviction trade, looking to get some near-term long market exposure against some single name bearish bets. This structure if sized appropriately relative to your book could offer a nice risk reward of almost 6x your money if the SPY is up about 3.5% from current levels.
** As usual, this is structure is meant to be educational, as prices will move, so look at where the stock is trading and try to maintain the ratio set out above if looking to adjust strikes……and as always on a multi-leg trade like this use limit orders as their is a ton of bid ask in this spread.