How long since you went on a roller-coaster?
Since last summer, the market has taken investors down and up, and up and down. If it feels like a trip on a coaster, you are right! It can be terrifying but also be fun and profitable.
Now, in early 2016, we see the markets diving in sympathy with oil prices and in fear of higher interest rates. Add a devalued Chinese yuan and a sprinkling of terrorist attacks, and the market again has the jitters.
Over the past few months, we have shown how to use deep-in-the-money options to rake in significant profits with minimum risk. Take a moment and read our basic SPY strategy.
In this blog, I explain how to ride the SPY coaster and make some profits using Put and Call options.
This week and next (trading days Jan 11-15 and 18-22, 2016) will be crucial as disappointing earnings are likely to plunge the market lower again. [click to enlarge]
Volume may pick up and prices wash out, creating oversold conditions. We expect to see the market test the August and November closing lows of (about 185.2 and 186.9). But any drop will be followed by a strong rebound as buyers re-enter the market and scoop up bargains in technology and other over-sold shares.
With this scene in mind, we are holding short Calls (sold for a credit) at 180 and expect to add short Puts (to be sold at a credit) from 200 as soon as we see a reversal. As with all our options trades, we have calculated limited risk. as follows:
Expecting a drop . . .
- SOLD Jan 2016 180 /200 Calls at 18.00 credit, with risk limited to 2.00
This trade is already operational and we will close it out whenever SPY reaches our downside goal of about 187, or possibly hold almost until expiration on Jan 15.
Then expecting a bounce . . .
- TO SELL Feb 210 / 190 Puts at 17.50 credit, with risk limited to 2.50
- This order is already in place, but we don't expect it to be filled unless SPY get down to around 185-187.
In all of this, we are not trying to predict where the market is going. Instead, we are simply prepared, with orders already placed, IF the market goes down significantly. If the SPY suddenly cascades down to 180, we will be quite happy, as our profits on the deep ITM Calls will be even larger.
The bigger the drop, the bigger the profits, and then the bounce!
For more information, contact us! Keep reading on our website Honolulu Options Traders. Classes are every Tuesday at Manoa Innovation Center, 2800 Woodlawn Drive in the Manoa Valley near the University of Hawaii main campus.
Credit: Image by Aaron Bernard of LiquidLightImages (and HOT member.)
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