I started steps in Phase 1 to exit my short positions. Though I have not covered any positions yet, I made some initial put option purchases (you didn't think I was going to abandone my chances at profiting from the correction did you?). Specifically, I purchased the March SPY 106 put contracts in a quantity representing about 40% of my short position on the S&P. I will look to do the same as I see the DIA and QQQQ reach reaction highs. I am targeting put contracts that are about 6% out of the money. I choose this level because I expect the correction to be in the 12-15% range. My target for the S&P remains at 960 - with a possible 830 if things get real ugly. If it occurs between now and March, I will profit nicely.
Phase 2 will be to cover the short equity positions - incrementally - as reaction lows occur. I will do this by selling in-the-money put options at the lows in the front month. This will allow me to get a premium over the strike price. There will be at least 2 reaction lows between now and March - giving me two periods of strategy assessment. If the market is pushing lower - great, my put options will be increasing in value and I can cover at lower prices with higher premiums. If the market is pushing higher, fine - all the more reason to exit the positions.
I like this strategy because it preserves my ability to profit from a correction (in a time limited manner), allows me to extract the maximum return (least negative) when covering, leaves open the possibility of keeping my short positions (and benefiting from the puts simultaneously) should the market take a hard turn lower.
It gives me great relief to have this plan and work on this project in the coming weeks. I feel much more productive at the desk and far smarter than I did just a day ago. One of the worst things that can happen to a trader is paralysis when the market fails to meet expectations. But the key thing to understand is that paralysis is the result of not having clear alternatives.The only cure is to think through all the scenarios in advance and prepare, prepare, prepare. This applies in every setup, whether it is a day trade or a cyclic swing. We trade best when we are in control.
Anyway, the plan is in motion. My technical analysis from here on out will focus on reaction highs and lows that support my strategy.
Good luck out there!
PS-> How about that housing data? And the GS downgrade by MW?
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4 comments:
I guess my only comment is that at some point in the near future we will begin a multi-year grind. From where we can't know, but it will start sooner rather than later.
Hey Kerry,
Hope all is well. I think we are in the grinder now - each 10 point gain is getting tougher and tougher - though a gain nonetheless.
The markets are strategically inflated by FED action - not overtly, rather blatantly. Actions which are more often praised in contempary media rather than scorned for the ultimate damage that they will cause. Based on the already low approval ratings facing the current administration, it is unlikely that the FED chairman (awaiting re-appointment) is going to change course or let the equities markets fall. Too many 401K plans still sitting well below their 2007 levels.
In order for this market to correct, a breaking point must be reached. One which will generate sufficient exit pressure on the current participants (which does not include most of the retail investors - at least not directly). This "breaking point" may be a default by a major country, a sudden and relentless political attack (populist outcry) against the administration concerning the US debt/monetary policy, an urgent bail-out of the FDIC and/or several large US banks, a series of significant corporate misses and/or substantially lowered guidance, exposure of corporate accounting scandals, or (God forbid) hostile events against our nation.
As a technical guy, I am disgusted by what I have observed - more importantly, I just can't "hang on" waiting for the "hail mary" event with my current trading vehicles. For me, being short equities is too high a risk for the circumstances. After carefull consideration, shifting to an options strategy (or option/equity hybrid) is much safer.
How about yourself - how are you playing this market?
Cheers!
David , I am happy that you have relief, Piece of mind has no price .
I will wait out this upleg not alot of room left in the wedge .
My Best for everyone
Hey Payline,
I am putting up a new post with some analysis on the ES.
Cheers.
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