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LEAPS! (by Fujisan)

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Fujisan here. Oh, what a week!  Congratulations to all the bears who hang on to the short positions all the way from last week.  I took my short profits too early and did not have a chance to enjoy a big drop on Friday, but all and all, that was a good week for me.

Here is my weekly update.

SPY Daily Chart

As you can see, SPY is making a wonderful alignment both in time and price.  What's worth mentioning is that SPY seems to be in 21 day cycle and if this pattern holds, the market will bounce early next week.



IWM Daily Chart

Here is IWM update.  I just wanted to point out how perfectly this symmetry was being formed.  I call it "IWM Golden Arch"!!



 VIX Daily Chart

 Here is VIX daily chart.  I'm expecting a pullback pretty soon.




EUR/USD Daily Chart

The trend line in EUR/USD is still holding, but if it breaks below Wednesday's low, I will give up on this bullish pattern.



If EUR/USD breaks the trend line, the immediate target would be 1.4486.


Now, there are 3 big questions that I normally receive from the posters and they are the followings:

1. How can we take advantage of P3

2. What is the best option strategy for a day trade?

3. How can we hedge?

Let me address the first question.

I know many of you believe that this is the beginning of P3 and this downside is going to last for some time.  Although I personally believe that this sell off will be followed by another big rally, toward mid 2010 (for those who are interested, please revisit my posting of Three Peaks and Domed House), this is a good opportunity to discuss what you can do if you like to have a long term position holding.

LEAPS (Long-term Equity Anticipation Securities)

LEAPS are long-term option contracts that allow investors to establish positions for a period of up to three years.  Consider this as a substitute of shorting the equities (but much less cost and better risk/reward).  If you are trading SPY, you could pick up Dec 2010 ATM or ITM put options.  DO NOT pick up OTM options.  I know it's much cheaper to buy OTM options for speculation purposes, but it's very hard to hedge the position when it's far from the current strike price. 

2010 Dec ATM put option (Beginners Level)

Here is an example of ATM LEAPS.  This is a 2010 ATM put option and the cost of the trade is $10,850, the risk is $860, and the possible reward (1 standard deviation of the move) is $7,800.  Not too bad for a 2 months trade.



Dec 2009 ITM Option (Beginners Level)

For those who like to have a much closer expiration, here is Dec 2009 ITM put option at 115 strike price.


Warning:  Unless you know what you are doing, please DO NOT buy the front month options or OTM options.  These are a prelude to a theta burn, and exactly the reason why many new option traders lose money in the option market.  Please do yourself a favor and buy the options with at least 60 days to the expiration.

SPY December 2009 Open Interest

If you take a look at December open interest, there are more than 250K open interests at a strike price of 100, 95, 90,and 85, and market participants are speculating SPY to drop toward 90/85 area by December OPX.



SPY December 2009 Butterfly (Intermediate to Advanced Level)

For an advanced option trader, here is SPY 100/95/90 Butterfly.  There is no stop on this position, so please allocate your "speculation" part of your money into this position.  Do not risk more than 1% of your account balance. 


You can close out your position once SPY hits your short strike price (i.e., 95), or add on another butterfly to create iron condor as follows:

Butterfly + Butterfly = Iron Condor


Hedging GS

 A few weeks ago, I have discussed an example of shorting GS via Jan 2010 put options.  Here is an update on GS chart. 


GS has hit my first target of 170.  This is what it looks like now.


Now, let's assume that you are sitting on a very nice profit of $1,600 (per contract) right now and expecting a pullback toward 180 early next week.  What can we do to lock in the profit?

The obvious exit strategy is to close out your position, but let's assume that you are expecting more downside going forward (after a pullback) and do not want to exit your position but like to lock in the profit.  Is there any hedging strategy that you can employ in this kind of situation?

If you sell Nov put option at $220 strike price, you can lock in your profit and not affected by the delta (price movement) of the underlying stock.


BIDU Butterfly

Last but not least – here is my BIDU daily chart.  My price target is between 310~270 by Dec OPX.


Here is Dec 260/310/360 BIDU Butterfly.  Due to the highly speculative nature of the position, please do not risk more than 1% of your account balance.


OK, that's all for now, folks! Have a wonderful weekend, everybody!