Next week is the option expiration (OPX) week once again, and this is one of my favorite weeks as an option seller to take advantage of the positive theta. I hope you enjoy the OPX week as well. If you know how to play with the option spreads, OPX would be much more enjoyable.
SPY Gartley Pattern Update
As I pointed out in my last week's post SPY Gartley Pattern (by Fujisan), I am seeing a development of the first leg of Gartley and it's right on target. I'm expecting a possible peak early next week and sell-off toward the end of the week. My upside target for this first leg up is 109.68 and the pullback target is 107.35.
Gartley Pattern on Hourly Chart
It's also interesting to point out that I see a smaller Gartley pattern (on the hourly chart) formation within this Gartley (on the daily chart). Here is the ES hourly chart.
I see 1094 as a possible reversal point for ES due to the following reasons:
1. The monthly & daily pivots cluster around 1094 (remember, ES hit the the exact monthly pivot last Friday and reversed).
2. 50% fib from the recent high-low.
3. Gartley ab = cd pattern completes exactly at 1094.
(Note: SPY and SPX are slightly off on the above items (a=c does not coincides with monthly/daily pivots) and ES demonstrates the cleanest relationship of them all).
I would have to point out that, if ES runs through 1070 level on its way down, it would come back to retest the recent low of 1040.75.
SPY Feb 106/107 bull PUT spread (credit spread)
I have discussed 106/107 bull put spread last week and this is how it looks now. You would be making 80% return just in one week if SPY hits my target of 109.68. Not too bad considering the underlying's whipsaw movements this week. The beauty of this position is that you are earning the time premium (positive theta) every day as long as the underlying stays above 106.5 (break even point).
SPY Feb 110/111 bear CALL spread (credit spread)
I also discussed 110/111 bear call spread last week as one of the examples to go short once SPY hits the target price of 109.68 (please make sure that you wait for the price rejection before you go short). Once again, we only have 3 days to work this position out and if SPY decided to go above 110, I would get out of this position right away.
Why Credit Spread?
The reason that I prefer a credit spread rather than a debit spread is that, if you decide to leave your position on through OPX, You don't need to close your position!! In the above example, if SPY expires below 110 for Feb, both 110 and 111 call options are going to expire worthless and therefore, no need to buy them back. If this is a debit spread, both 110 and 111 put options are "in the money" and therefore, you need to buy them back before Friday's close if you don't want to exercise your options.
Interpretation: You can recognize your max profits on your position with a credit spread AND you can save the commission.
SPY March 110/105 bear CALL spread
If you are not familiar with the option spread and don't want to deal with the Feb options, here is March 110/105 bear call spread.
(If you are a naked option trader (interpretation – "naked option" means "not hedged", i.e., trading the single leg only and not as a spread), please remember that the spread almost always has a better risk/reward than a single option position UNLESS the market all of a sudden crashes to the downside and makes a 2 standard deviation move (which is less than 2% of the statistical probability).)
EUR/USD Three Drives Pattern
Here is the updated EUR/USD chart. My expectation for this pair is the sideway consolidation for a while until it finally hits the other side of the channel, and then continue to the downside. Let's see how this pattern develops in the coming weeks.
Happy Valentine's Day, everybody! Enjoy the Winter Olympics and see you next week!
