Quick Market Touch, Recap of this Weeks Trades and Today’s Playbook

by Dan July 29, 2011 8:59 am • Commentary

Not going to rehash all the debt ceiling garbage this morning, but I will give you a sense for how I am going to play it.  I have a few trades that I put on this week that will need to be managed today as I expect a crescendo into today’s close.

S&P futures are down 1% as I write at 9am to ~1283, on the heels of a dismal preliminary Q2 GDP reading and obviously the misery in Washington.  The SPX cash closed yesterday at a very key support level of 1300 and will clearly gap below those levels on the opening.  I would expect the index to pause at it’s 200 day moving average at about 1284, but if it doesn’t and the news, or at least the perception of the news gets increasingly negative throughout the day than all bets are off.  After 1284 I would look for a pause at the top of the last consolidation area back in mid June.


[caption id="attachment_3624" align="aligncenter" width="300" caption="1 yr SPX cash chart from Bloomberg LP"][/caption]


This administration and Fed have proven time and again in the last few years that they will be reactive to gyrations in the markets and any significant negative price action today could cause for them to act.

If we are down another 2% today at some point with the VIX shooting higher to the mid to high 20s, the risk may be to the upside……once we get to an extreme level of bearishness in such a short period, the chances of even a short term resolution over the weekend make risk reward of staying short mildly unpalatable to me.  This is coming from a guy who had the move lower in May and June right, only to have it whisked away in a week after the Greek Austerity vote….that rally was violent and while I had been covering lots of shorts on the way down, I did not catch the rally on the long side and that was a huge missed opportunity.  While I remain cautious on the markets near term I don’t want to be stubborn.

Managing This Weeks Trades:

Yesterday I sold half of my SPY July29 131/130 Put Spread that expires on today’s close (read here) for a profit 2.5x what I paid on Tuesday.  My thought here was too take some risk off into the expected Boehner vote last night (that obviously didn’t happen) and this way I could not lose on the trade.  At some point today that spread will be close to its full value and I think you will want to take it off as the risk of holding for the remaining ten to fifteen cents won’ be worth it for the potential of some compromise and an ensuing squeeze.

As a semi-permabear I am always long the SDS, the ETF that replicates twice the inverse performance of the SPX, and as I was selling some of the put spread I bought some more of this.  These ETF’s are not for everyone, and depending on your risk tolerance I would especially be careful not to use them in accounts such as IRAs as they have significant leverage and should only be used as part of your small allocation towards speculation.  I routinely adjust this position and try to take advantage of short term market opportunities….I will look to sell most of this this morning if the market starts to puke.

As for my Euro play with the FXE Aug 142/140/138 Put Fly (read here) I think I have this one right where I want it and have plenty of time for this to play out…..the Euro started the week as a mild flight to quality vs the dollar, and while it touched resistance at the 1.45 level it just couldn’t get through.  I am fairly confident that once we get even a short term resolution that eyes will be turned on Italy and Spain and the Euro will re-test the lows made earlier in the month.

I did add one little low premium trade in NFLX prior to earnings, the July29 265/255/245 Put Fly that I paid 1.10 for. (read here)   This one is going to take some trade management as it expires on today’s close.  Would like the stock to sell off towards my short strikes….check back for updates.


RISK REDUCTION was the name of the game this week for me, and it was the right move…..I was sloppy into Monday evenings report by BRCM and left on a low conviction Aug Put Spread that was loser…..In some ways this was a great heads up for me to re-evaluate why I had other positions on……

-I sold my AMZN Aug 200/190 Put Spread before earnings as I basically threw in the towel on playing for a move to the downside short term and the stock was up to new highs on sold results……(read here)

-I closed long Sept 22 ERTS calls into earnings as the stock seemed to have a lot of good news in it (which apparently it did, stock is off 7% in the last 3 days).  (Read Here)

JNPR wanted to play for a bounce, but when I looked at some of the results of competitors and customers, it appeared that it would be very hard for this company to demonstrate uspide.  This position I actually sold for a small gain (read here).

Following JNPR’s Disaster and getting lucky with Goldman Sach’s upgrade of CSCO yesterday I actually sold this position practically unchanged as I don’t want to play for earnings in early Aug and will look to re-establish in a longer dated fashion as the turnaround will likely take some time. (read here)


PLAYBOOK for TODAY into EARLY NEXT WEEK:   While I am not exactly in the camp of getting balls long on a big sell off today into Monday, I do think it makes sense to take some profits on shorts and possibly monetize some hedges…….I want to move my feet and not get stubborn…..

1. Selling balance of my short term play on the SPY at some point this morning…..followed by some selling of my long SDS equity position.

2.Looking at some SPY Aug 5 weekly call spreads or flies to the upside to play for a potential snap back on a debt ceiling resolution.  I want to look for low premium, low risk high reward structures.

3.If VIX spikes dramatically today I want to buy SOME of a position on XIV as I think debt ceiling deal should cause short term panic to abate.