The Federal Reserve’s policy statement, released at 2pm ET Wednesday, sent the U.S. dollar cratering. Even though the Fed’s words were more hawkish than the market’s real consensus prior to the statement, the Fed itself moderated its expectations from its March policy statement, leading traders to form an even more dovish view.

In the eyes of traders, the Fed has lost all credibility, and despite the fact that the central bank’s words indicate a likely September “liftoff,” the market doesn’t buy it. Fed funds futures’ estimate for the likelihood of a September hike slipped from 28% before the statement to 22% afterward, and in early trading today, the dollar is near multi-month lows.

Since spiking on a bullish jobs report for May back on June 5, the dollar has been under constant pressure, even as U.S. economic data has continued to look bullish. Just today, jobless claims reached a 15-year low and it was announced that inflation picked up in May. If the Fed is really data-dependent, as it says it is, then rates should definitely be hiked in September – but nobody trusts the Fed anymore, and for good reason. Their interventions into the global economy make markets much less rational, and thus more difficult to predict.

Where We Stand

Through one month, we’ve taken gains on four of our plays and only notched one loser. The loser, July calls on AAPL, was a big one, costing us $1,274 on $1,989 risked – ouch! But those losses were more than offset by the gains on our biggest winner, a credit call spread on QQQ, which we closed out on Monday for patriotic gains of $1,776 on $1,968 risked – a 90% winner!

Between QQQ‘s gains and AAPL‘s losses, we netted $502. Add in the $440 winnings on PM, $405 gains on MCD, and $576 profit on USO, and our total net-winnings on closed-out positions stand at $1,923 – almost enough to pay for a new position. But we’re currently down on three of our four open plays, to the tune of $1,511, as of 10:30am ET. Thanks looked a little worse by publication time near 12pm ET.

I’m hopeful that we’ll be able to exit our open plays for lighter losses or possibly even gains – our bearish plays on BA and GILD have only recently turned negative, as the stocks have soared higher in early trading – but nevertheless, we’re up a net $412 for month (as of 10:30am ET), counting open and closed positions, despite things going horribly wrong for us at 2pm yesterday.

Currently, we have two open positions that should rise as stock prices fall – credit call spreads on BA and GILD. As credit spreads, time value is on our side: all other things being equal, the value of the spreads should fall with time, and since we’re short, that’s good for us. We’re down on both of these positions today, but we were up as recently as yesterday, and now isn’t the opportune time to exit, even if we ultimately have to take losses.

Our other positions are inversely correlated – long calls on UUP and a credit put spread on GLD. Our UUP position is more leveraged, and thus we’ve taken steeper losses on UUP than we’ve made gains on GLD. Nevertheless, UUP has sold off so hard, and we still have so much time remaining on these calls, that I don’t think it makes sense to cut our losses here. I’d rather continue to hold our UUP play and possibly add to it, should the opportunity present itself.

Investment Thesis

Given our positioning at roughly 75% bearish, and 75% short time value; it makes sense to look for a bullish, long time-value play – i.e., long calls or a debit call spread on a stock we think is positively correlated to the broad market, but has the potential to be a standout winner. The stock that fits that bill is Dow Chemical (DOW).

As you can see from the chart above, DOW is breaking out higher today, but this is no time to be searching for value. Since May 4, DOW was up 3.29% through yesterday’s close, while the Materials Select Sector ETF (XLB), of which DOW is the third-largest component, was down 1.47%.

What makes DOW look strong here? Well for one, it will benefit from a weaker dollar, should the greenback stay soft. DOW generates about 70% of its sales outside the U.S., but even the strong dollar didn’t stop the firm from reporting blowout Q1 earnings, even as many S&P 500 companies blamed currency issues for missed targets. DOW CEO Andrew Liveris delivers results, not excuses.

DOW also benefits from higher oil prices, thanks to its ethylene operations. A weak dollar should be bullish for crude, even as global markets remain oversupplied. But oil’s fundamentals aren’t nearly as bearish as natural gas’s, which was down 2% this year compared to oil’s 12% gains, as of yesterday’s close. DOW uses proprietary trade secrets to turn nat-gas into feedstock, whereas its competitors have to use the more-expensive naphtha. Thus, DOW is roughly anchored to a weak dollar, strong oil, and weak natural gas – perhaps a perfect recipe for gains, going forward.

The Play

I like the $52.50/$55 July debit call spread on DOW. We’ll buy (buy-to-open) DOW’s $52.50-strike July calls as the dominant leg of our spread, and we’ll sell (sell-to-open) DOW’s $55-strike July calls as the recessive leg of our spread.

We’ll pay more for the $52.50 calls then we receive for selling the $55 calls, but the credit on the $55’s will allow our position to go further. Yes, we’ll be capping our maximum gain at the distance between the two spreads, less the net-debit we pay for entering the play, but I don’t see DOW going much higher than $55 before the July 17 expiration anyway.

As of 12pm ET, DOW‘s $52.50-strike July calls had a $1.56 ask, with 10,600 contracts of open interest; and its $55-strike July calls had a $0.39 bid, with 16,442 contracts of open interest. At these prices, we’d pay $1.17 ($1.56 minus $0.39) to enter the spread, which means we could enter it across 17 contracts per leg to stay under our $2,000 maximum risk limit.

Sample Ticket:


Objective: Since this position is designed to fit into our portfolio of existing positions, we won’t set a price target at this time. This position’s gains could be offset by losses in our BA and GILD positions, and vice-versa. I believe DOW to be a superior stock to BA, and while GILD is an absolute monster, the market is overly bullish on it and the health-care sector in general. I hope to eventually take gains on all three of these positions.

Open Plays

BA $150/145 July credit call spread

Entry price and date: $1.45 credit on 5/26/15

Position Size: 5 contracts per leg

Total Risked: $1,775

Current bid/ask: $2.19/$2.44 (11:40am ET)

Target: $0.71 ask (for 20% gains)

Despite losing out to competitor Airbus at the Paris Airshow and being down in pre-market trading today, BA has broken out for huge gains today, catapulting through the $145 level and above its 50-day moving average (red line), to face resistance at its upper Bollinger band. As of 11:40am ET, we’d have to pay a painful $2.44 to buy back our spread, which we received $1.45 for back on May 26.

As recently as yesterday, we were still profitable on this play, and while BA could be staging a genuine breakout here, it’s too early to tell, and the stock could easily slide back below $145. If BA closes beneath that level on July 17, we’d keep 100% of the $1.45 credit we received, and that remains a distinct possibility. Patience pays when holding credit spread, so let’s hold and check back in on Monday.

UUP $25-strike September calls

Entry price and date: $0.58 on 6/8/15

Position Size: 32 contracts

Total Risked: $1,856

Current bid/ask: $0.30/$0.32 (11:47am ET)

Target: $0.70 bid

The bullish dollar thesis was behind each of our winning plays thus far, but it appears that the Fed may have killed that story. Nevertheless, with three months left until our calls expire, and with the dollar near its multi-month lows, I don’t see the wisdom in selling here, even if we could still salvage half of our capital. Any losses in the dollar here are likely to be minor, and time value on September options will drip away very slowly over the next month. There’s a better chance of a dollar surge than further collapse, and thus I think it’s wise to hold on, despite the pain.

GILD $125/120 July credit call spread

Entry price and date: $1.51 credit on 6/11/15

Position Size: 5 contracts per leg

Total Risked: $1,745

Current bid/ask: $2.07/$2.28 (11:50am ET)

Target: $0.81 ask (for 20% gains)

Our GILD position hasn’t performed as expected either, and in early trading today, the stock finally broke above $120. As with BA, now is not the time to close this one out, even if we end up taking losses in the end. The market should pull back before reaching meaningful new highs, as the Fed’s statement wasn’t nearly as dovish as the market’s action today would seem to indicate. A July 17 close below $120 is clearly still possible, and not even all that unlikely.

GLD $110/115 July credit put spread

Entry price and date: $1.94 credit on 6/15/15

Position Size: 6 contracts per leg

Total Risked: $1,836

Current bid/ask: $1.68/$1.81 (11:50am ET)

Target: Hold until expiration for 64% gains.

We wisely entered this play as a hedge on Monday. We are net sellers of GLD puts, so when GLD goes up, our puts go down; and since we’re short the puts, that’s bullish for us. Credit put spreads are probably the most confusing option trade to pull off, but it made sense here, and it makes sense to continue to hold.

Previous Winners

PM $80/$82.50 September debit put spread

Entry price and date: $0.97 on 5/18/15

Position Size: 20 contracts per leg

Total Risked: $1,940

Closed: Sold at $1.19 on 6/5/05 (10:43am ET)

Profit/ Loss: +22.7% ($440 profit)

MCD $95/$100 June debit put spread

Entry price and date: $2.15 on 5/21/15

Position Size: 9 contracts per leg.

Total Risked: $1,935

Closed: Sold at $2.60 or higher on 5/28.

Profit/ Loss: +20.9% ($405 profit)

QQQ $113/110 June credit call spread

Entry price and date: $1.36 credit on 5/28/15

Position Size: 12 contracts per leg

Total Risked: $1,968

Closed: Covered at $0.16 on 6/15/15 (12:16pm ET)

Profit/ Loss: +90.2% ($1,776 profit)

USO $21-strike July puts

Entry price and date: $1.48 on 6/1/15

Position Size: 12 contracts

Total Risked: $1,776

Closed: Sold at $1.96 on 6/5/15 (9:33am ET)

Profit/ Loss: +32.4% ($576 profit)

Previous Losers

AAPL $131-strike June calls

Entry price and date: $1.53 on 6/4/15

Position Size: 13 contracts

Total Risked: $1,989

Closed: Sold at $0.55 on 6/11/15 (2:23pm ET)

Profit/Loss: -64% ($1,274 loss)

Happy trading!

Jason’s Bio

Jason Seagraves is a 37-year old writer, options trader, entrepreneur, homeschool dad, and evangelist for free-market economics. He launched a successful dot-com business while still in college in the late 90’s, and then went back to school to graduate with a degree in Business, concentration in Finance, from Siena Heights University in 2006. That year, he also earned a Series 7 stockbroker’s license, but opted to pursue a career in freelance writing. From 2008 through 2013, he worked as a “ghostwriter” for a popular stock and options trading newsletter, before joining up with Dividend Lab for a stint in 2014. Now he’s back providing market commentary and actionable options trades for the Big Deal Newsletter, and he’s happy to be here!

 

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