Fujisan here.
Oct OPX is finally over with fanfare of GOOG earnings. I'm happy that I nailed it once again. Anyone who decided to join me on GOOG earnings play, congratulations to you all.
What I wanted to demonstrate with GOOG earnings is that, the options are such a versatile financial product, and you don't need to go either long or short to make money (in fact, if you have gone long or short with single options before the earnings, you would have lost your money regardless of the direction of your trade due to IV rush – I'm hoping that I could cover this topic sometime in the future).
If you come up with a very precise time and price projection (needless to say, the more accurate, the better), and if you come up with an option strategy that fits your market view, you could double or triple your money overnight without risking too much money.
SPX Price Projection:
Here is my updated SPX price projection that I have been posting for a while. My current price target for this particular wave has not changed.
Now, I was being asked many time to come up with an option strategy to "take advantage of P3 price move". I know many of you are expecting a "crash into 2010" scenario after this rally, and trying to pick the top so that you could take a ride all the way down to DOW 300.
Before you jump into "P3" conclusion, I would like to discuss the possibility of "one more leg up" scenario. Yes, that's right. I believe that we are not done at SPX 1100 as of yet.
Remember the basic Elliott Wave Theory of "W3 being driven by the institutions and W5 being driven by the retail traders"?? This entire rally was being driven by the institution (which shall not be named) and the government pumping the money into the market, and not many people were able to participate in this rally. This is a perfect set up for "one more leg up" by the retail traders who did not have a chance to participate in the rally.
Three Peaks and Domed House
Now, I'm also exploring the possibility of the current price pattern to be "Three Peaks and Domed House". According to Bulkowski, this is a combination of "Triple Top", "Rounded Top", and "Head and Shoulder" pattern which looks like this:
By the way, Tim's favorite 1938 price pattern is identified as "Domed House and Three Peaks", according to Bulkowski.
My good trader friend, Zig Zag, was also doing a similar market study and kindly agreed to share his 1978 comparative study as follows (thanks, ZZ!):
Does this pattern look like "Three Peaks and Domed House"? I will leave it up to you. As this price pattern is so complex, we only know it after the fact. At this point, we are all speculating, and we don't know the answer, but I'm hoping that I could help you to look at the possibility of "one more leg up" based on the above price pattern and the studies and not overly bearish on its way down.
GS after the earnings
As we all know, GS beat the earnings estimates and yet started selling off right after the earnings. Typical "buy the rumor, sell the news" mentality. Here is how it looks like now:
As discussed above, the key here is not to get into the short position overly aggressive. I see the remaining Nov/Dec time frame more like a consolidation period before the market makes another run up toward mid 2010.
If you missed a good entry point on Thursday, you can still wait for a retracement for a better entry. If it didn't come back, and continued to sell off, you could get in upon the breakout of the neckline. If you still miss the trade, well, there is always another trade.
Here is some suggestion for GS option play:
January 220 Put Option (Beginners Level)
This is a single put option with January 220 strike price. As last week's GOOG earnings play were geared more toward the intermediate to advanced option players, I understand that some of you might have been totally confused or have no clue as to what I was talking about.
I would like to provide the comprehensive options strategies to all the levels so that more people could enjoy the beauty of the option play going forward.
What I like about this position is the followings:
1. Because this is a deep in the money option, time decay is minimal
2. This position has a delta of 85, which means that it moves $85 up and down for every $1 move of the underlying stock. As one contract represents 100 shares of the underlying stock, this position moves similar to 100 shares of the underlying stock WITHOUT a capital commitment of 100 shares. It only costs $3,400 for one contract of Jan 200 put options whereas it would cost just as much as $18K if you decide to short it instead. In addition, GS is not available to short (at my TOS account) so you cannot short it in the first place.
3. Risk/Reward ratio is pretty nice, assuming that your entry is close to the swing point, and you are going to hold on to your position until you hit at least the first target of 170.
Single Option Play Book
For those who are new to the options and like to play with single options, here is a play book for the single option:
1. Do not buy the front month options.
2. Always buy the options with more than 60 days to the expiration.
3. Avoid OTM (out of the money) options.
4. Close out your position before 30 days to the expiration.
5. Set up both time and price stop (of the underlying, not the option in itself) to avoid unnecessary time decay.
Ok, I think I have provided enough charts for the weekend.
The ES Futures
Before I'm totally gone, here is for ES traders (I have a little bit of everything. I should start covering the currency trade for Wilson pretty soon). The price to watch on Monday is 1070.25.
I hope everyone has a wonderful weekend and see you on the other side!
