Greetings, traders! It’s been a tumultuous week: Stocks posted their biggest one-day losses in months on Monday, as the Greek crisis reached its peak. China’s stock market has gone into bear territory, off more than 20% from its recent highs. The U.S. Labor Department posted employment data for June that were mixed – unemployment fell to 5.3%, but the number of new jobs came in slightly lower than expected, and the labor-force participation rate dropped, too.
Global markets are facing ample uncertainty as the U.S. heads into a three-day holiday weekend. U.S. stock and bond markets will be closed on Friday, in observance of Independence Day, while Greeks will head to the polls two days later to vote yes or no on declaring their own independence from their international creditors. The tension’s so thick you couldn’t cut it with a simple knife – you’d need something sharper.
The purpose of this newsletter is twofold: One, to make money; and two, to be educational. Nothing teaches lessons better than stinging trading losses, and we’ve had more than our fair share over the past week. Of course, lots of traders were caught up by the market’s sudden declines that began a week ago and accelerated when markets reopened on Monday, but what has been so frustrating about our losses is that we had been waiting for a market crash but were poorly positioned for it when it finally happened.
I’ve commented before that it’s a “rookie mistake” to cut your winners short and let your losers ride, but that’s exactly what I’ve done, inadvertently. A week ago, I said it was time to take risk off the table, and I recommended covering our Gilead (GILD) bear call spread for a loss of $350 while holding onto our Dow Chemical (DOW) bull call spread, since it was our only bullish position. That move was dead-wrong, as the Gilead play would be firmly in the black now, while the Dow play was closed out for losses of greater than 70%. We originally entered the Dow play as a “hedge” – just like the Apple “hedge” that also cost us more than a grand in losses. Second-guessing our broader investment themes, in an attempt to avoid the sin of hubris, has punished our returns and put us in the red, overall, after a superb start.
If we had held our Boeing (BA) bear call spread longer, along with our puts on the iShares Russell 2000 ETF (IWM), we’d be in much better shape, too. As it is now, our open positions on the PowerShares DB US Dollar Bullish ETF (UUP) is looking much better following the dollar’s recent surge, but gold (GLD) is trading at a multi-month low, resulting in unrealized losses on our GLD bull put spread. Our short-term calls on the Utilities Sector ETF (XLU) fell to their stop-loss, but I personally didn’t execute the trade there, looking for a bounce-back. Today they’ve rebounded by more than 100% – I hope you held on, too.
Going forward, we’ll be less hasty about taking profits. It’s awfully tempting to grab 20% gains after just a couple of days, and to wait for losing plays with lots of time value to rebound – but it can be deadly erroneous, as we have learned this past week.
Monday’s broad-market selloff had the air of being different than the market’s other recent pullbacks. When the S&P 500 pulled back on June 9, it closed in a near-doji right at its bottom Bollinger band – the bounce-back was easily anticipated. Four trading days later, it fell to a similar level but opened and closed much higher than on June 9, and reached a much higher intraday high – again, the bounce-back was easy to see coming.
But on Monday’s selloff, the S&P fell through its bottom Bollinger and reached multi-month lows, with a subsequent recovery over the past three days that has been more measured. In the recent past, the S&P has blown past technical resistance as if it weren’t there, cheered on by the promise of continued accommodation from the Fed. I think the index will crumble when it next faces the resistance of its Bollinger midpoint and/or 50-day moving average line, somewhere around the 2,100 level, where it’s had multiple touches and near-touches over the past three months:
The S&P 500 also experienced its most definitively bearish MACD crossover on its three-month chart, and it dipped into the so-called “downtrend zone” on its Williams %R indicator. The Williams generally rises along with stock performance, but the S&P 500 should encounter resistance at or near the -50% threshold that separates bullish from bearish performance.
With the VIX elevated and option premiums high, a spread is the best way to make a bearish play on the S&P 500. I think a longer-term bet on the market’s decline makes sense here, and that’s why I’m looking at September puts on SPY, the S&P 500 ETF.
As you can see, the chart for SPY corresponds very closely to that of the S&P 500 – I did clip the charts about a half-hour apart, for the record. I like SPY‘s $208-strike September puts as the dominant leg of our debit (bear) put spread, with its $203-strike September puts sold-short as the recessive leg.
As of this writing, SPY‘s $208-strike September puts had a $6.35/$6.38 bid/ask, with more than 38,000 contracts in open interest, and more than 1,000 contracts had traded in the first two hours of the day. The $203-strike September puts had a $4.59/$4.62 bid/ask with 13,832 contracts in open interest and 138 in daily volume. We could enter the debit put spread by paying the ask on the $208-strike puts and receiving the bid on the $203-strike puts, for a net debit of $1.79. Let’s enter this contract across 10 contracts per leg to stay well within our $2,000 risk limit.
Exit strategy: We won’t set a price target on this spread, since our chief sin thus far has been taking profits too early. Although we’re currently down on our UUP and GLD plays, adding this SPY bear put spread to our mix positions us well for the volatility I expect the markets will experience between now and the potential interest-rate hike in September.
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: $0.48/$0.51 (11:55am ET)
Target: $0.70 bid (for 20% gains)
The dollar has bounced back and put our UUP position in much better standing. I continue to think this is a good play to be in ahead of the Fed’s September rate hike. In hindsight, we should have been adding to this position on the dips.
GLD $110/115 September credit put spread
Entry price and date: $1.94 credit on 6/15/15
Position Size: 6 contracts per leg
Total Risked: $1,836 ($1,164 credit received)
Current bid/ask: $2.68/$2.83 (11:55am ET)
Target: Hold until expiration for 64% gains.
Due to the nature of our credit spread here, adding on the dips isn’t nearly as attractive. It’s amazing how gold has underperformed despite the tumult in Greece, but we have a lot of time left on this play, and I fully expect gold to catch a huge bounce, with GLD surging to above $115 prior to mid-September. In hindsight, a bull call spread would have worked better than a credit put spread, and we may have been able to take quick profits on gold’s short-lived surge in mid-June.
XLU $43-strike July calls
Entry price and date: $0.20 on 6/29/15
Position Size: 80 contracts
Total Risked: $1,600
Current bid/ask: $0.18/ $0.21 (11:55am ET)
New Target: Continue to hold this play into Monday, so long as your risk tolerance allows it.
This was a highly leveraged and risky contrarian play, and a slight delay between the writing of Monday’s newsletter and its publication led to some added confusion. Our calls did fall to their stop-loss level, 40% below our entry price, but I didn’t intend to bail from the play on the same day we entered it. This morning, XLU was up and our calls surged by more than 100% to back above where we entered. I recommend holding this play as to not chop our winners short, if you haven’t already bailed:
– Happy trading!
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)
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 ($725 credit received)
Closed: Covered at $0.71 on 6/29/15 (9:38am ET)
Profit/ Loss: +20.8% ($370 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)
IWM $126-strike July puts
Entry price and date: $1.12 on 6/22/15
Position Size: 17 contracts
Total Risked: $1,904
Closed: Sold at $1.45 on 6/25/15 (2:18pm ET)
Profit/ Loss: +29.5% ($561 profit)
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)
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 ($755 credit received)
Closed: Covered at $2.21 on 6/25/15 (12:21pm ET)
Profit/ Loss: -20% ($350 loss)
DOW $52.50/55 July debit call spread
Entry price and date: $1.17 on 6/19/15
Position Size: 17 contracts per leg
Total Risked: $1,989
Closed: Sold at $0.33 on 6/29/15
Profit/ Loss: -71.8% ($1,428 loss)
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!