Next Week Could Be the Moment of Truth for The Markets and Mr. Bernanke; Use SPY Weekly Options for Protection

by Dan August 19, 2011 2:52 pm • Commentary

Next Friday FOMC Chairman Ben Bernanke will give a widely anticipated speech at the now infamous Federal Reserve Bank of Kansas City Annual Economic Policy Symposium held in Jackson Hole, WY.

The SPX is about 2.5% above the intra-day low from last week and only about 1% from the closing low of 1121 on Aug 10th.

Lots of economic data next week from housing, to jobs to GDP on Friday capped off with Bernanke speech at 10am.

If you havn’t reduced long exposure in this market downdraft I can’t tell you now is the time to do it in a meaningful way as we are severely oversold….But you can use weekly options to protect longs or make a bearish near term bet.  

TRADE: SPY 113.60 Buy the Aug26 weekly 110/105 Put Spread for .85

-Buy Aug26 110 Put for 1.65 and

-Sell Aug26 105 Put at .80

Break-even on Aug26 Exp:

Profits: btwn 109.15 and 105 make up to 4.15 and below 105 make full 4.15

Loses: above 110 lose .85 or less than 1% of the underlying

Btwn 110 and 109.15 lose up to .85



I think the market expects the Fed to offer more plans for stimulus, and if it doesn’t get it will likely be very disappointed…..the data and the market action in the run up to Friday could cause an audible by the Fed chief and make a stronger suggestions of the central banks options.  Volatility likely to continue into next week and we could see a near term bottom….Two ways I see this playing out,  first the fed in the weekend financial press floats some trial balloons and we see how market reacts on Monday, if weekend chatter gets the markets back on decent footing than we could see a little short squeeze into the chairman’s speech, barring any weird stuff out of Europe or disastrous economic data.  Or Second, maybe Bernanke takes a few days off to ride horses and fly fish, as congress and the President seem to be doing and we continue with little help from policy makers and the equity markets continue their long journey back to round numbers like 1000 in the SPX and 10,000 in the Dow.   If this happens than I think a Strongly likelihood that the Fed has to make some stuff up Friday to halt the crash.

Either way I like the idea of owning short term, low premium protection back to what I deem to be a very important technical level of about 1050 in the SPX.