So we are looking for a close today above 1180 for the bears to stay alive, which would give a high chance of a sell off next week. Is that still correct?
Second time in two weeks, divergence in money flow detected in the market. This time the divergence is broader. Yet the market is holding up well. The underlying moving average that has defined the jan-feb decline and Feb to present rally, has continued to support the bull structure, as per one of Sundancer's charts from yesterday.
This is a brutal war of attrition. The structural conditions (overbought, over valued, rising yield pressure, extreme optimism etc) are there for a break in the rally. But certain technical conditions are absent (the bull structure as defined by Sundancer ma line). There are two risks here. The first one is the risk that the mad dash to the cliff has started. Even garbage stocks are attracting money. The second risk is that the market may crack violently when the bull structure falls apart. They keep pushing it and pushing it, eventually it is going to breakaway.
So what should we do? Use put options and protect the rest of the capital.
1. Take the amount of capital you have, and multiply that by the leverage factor you desired. E.g $100,000 * 2, to get a 2x effect.
2. Use At The Money puts that has some time left. Eg. SPY May 119 Puts.
3. To get the number of contracts needed to achieve 2x short : ($100,000 * 2 )/(119*100) = 17 contracts.
4. For a straight put: You just buy 17 contracts of SPY MAY 119 put, $2.40. Total cost $4080 + commish.
So from now till May 21, you are short 200%, at a cost of 4% of your total capital. 96% of your capital is safely in cash. (Before some smart asses want to point out that it is not the same as straight 200% short via futures and what not, yes, I know that. I am trying to keep things simple here.)
(Caveat: The ATM options are not always properly priced. When vix are skyhigh, option premiums are priced skyhigh, making it not worth buying. You would need to know about the option geeks then)
5. If you prefer, you can reduce the cost by getting a spread instead of a straight puts. A straight put gives humongous profit potential when Pee 3 doomsday occurs. With a spread, you give up the fat tail end of the downside profit, in return for smaller capital outlay.
6. To create a spread: You buy 17 contracts of May 119 puts @ 2.40, and SELL 17 contracts of May 112 puts @ 0.68, for a net debit of (2.40 – 0.68)=$1.72 per contract, ie $1.72*100 *17 contract = $2924.
I used the above as an illustration for how you can go about creating a 200% short positions while only putting 3-4% of your capital at risk. There are many different variations and nothing is set in stone. Options strategies can be very flexible, AND complicated. What the strategy does is to allow people to avail themselves to the Pee 3 of their dream, within a specific time frame, without having to put the whole account at risk at any one time. It doesnt mean one won't go burst keep betting on a Pee3 that never comes.
If anyone wants more detailed assistance with option strategies, Anna at HOB/OBB is THE expert and she loves to help. But don't be leeches. Pay up, sucka! At least donate to her kitty rescue fund.
nope. U is the gem. 😉 I am just a broken glass reflecting sunlight once in a while. Unloved and unwanted. lol
BTW you can also collar your stock, buy puts sell calls slight otm to offset the cost 🙂
SC,
The one thing I would change, and the one thing that I find misleading in nearly all options discussions:
Situation #1 (no options), 100% of capital is at risk
Situation #2 (options), 3-4% of capital is at risk
Right away, situation #1 makes more sense. But it's really more like this:
Situation #1, 100% of capital is at risk for some loss
Situation #2, 3-4% of capital is at risk for total loss
Now, it's not nearly as clear which is better.
We got it figured out Gere64… it's not you. You're welcome to post.
you're a gem 😉
So we are looking for a close today above 1180 for the bears to stay alive, which would give a high chance of a sell off next week. Is that still correct?
SC, Nice post and excellent explanation. thanks
Second time in two weeks, divergence in money flow detected in the market. This time the divergence is broader. Yet the market is holding up well. The underlying moving average that has defined the jan-feb decline and Feb to present rally, has continued to support the bull structure, as per one of Sundancer's charts from yesterday.
This is a brutal war of attrition. The structural conditions (overbought, over valued, rising yield pressure, extreme optimism etc) are there for a break in the rally. But certain technical conditions are absent (the bull structure as defined by Sundancer ma line). There are two risks here. The first one is the risk that the mad dash to the cliff has started. Even garbage stocks are attracting money. The second risk is that the market may crack violently when the bull structure falls apart. They keep pushing it and pushing it, eventually it is going to breakaway.
So what should we do? Use put options and protect the rest of the capital.
1. Take the amount of capital you have, and multiply that by the leverage factor you desired. E.g $100,000 * 2, to get a 2x effect.
2. Use At The Money puts that has some time left. Eg. SPY May 119 Puts.
3. To get the number of contracts needed to achieve 2x short : ($100,000 * 2 )/(119*100) = 17 contracts.
4. For a straight put: You just buy 17 contracts of SPY MAY 119 put, $2.40. Total cost $4080 + commish.
So from now till May 21, you are short 200%, at a cost of 4% of your total capital. 96% of your capital is safely in cash. (Before some smart asses want to point out that it is not the same as straight 200% short via futures and what not, yes, I know that. I am trying to keep things simple here.)
(Caveat: The ATM options are not always properly priced. When vix are skyhigh, option premiums are priced skyhigh, making it not worth buying. You would need to know about the option geeks then)
5. If you prefer, you can reduce the cost by getting a spread instead of a straight puts. A straight put gives humongous profit potential when Pee 3 doomsday occurs. With a spread, you give up the fat tail end of the downside profit, in return for smaller capital outlay.
6. To create a spread: You buy 17 contracts of May 119 puts @ 2.40, and SELL 17 contracts of May 112 puts @ 0.68, for a net debit of (2.40 – 0.68)=$1.72 per contract, ie $1.72*100 *17 contract = $2924.
I used the above as an illustration for how you can go about creating a 200% short positions while only putting 3-4% of your capital at risk. There are many different variations and nothing is set in stone. Options strategies can be very flexible, AND complicated. What the strategy does is to allow people to avail themselves to the Pee 3 of their dream, within a specific time frame, without having to put the whole account at risk at any one time. It doesnt mean one won't go burst keep betting on a Pee3 that never comes.
If anyone wants more detailed assistance with option strategies, Anna at HOB/OBB is THE expert and she loves to help. But don't be leeches. Pay up, sucka! At least donate to her kitty rescue fund.
SC, I faded you yesterday with may spy 119 calls. Sold this morning. I just wanted you to know that you are loved and faded.
There's only one Serge, Like there's only one Shaft. Shut your Mouth.