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Trendless Tuesday – Stuck at the Market Top

2,480! 

That was our shorting line last Tuesday and here we are (still) again on the S&P and waiting for SOMETHING to happen.  Volume on the S&P ETF (SPY) was only 26.8M, the lowest Monday reading of the year and less than 1/2 of Friday's volume.  Where have all the traders gone?  

How are we going to punch up through 2,500 if we can't even hold 2,480?  The Dow is a joke of an index (22,050 on /YM), so we don't count that and the Nasdaq (/NQ) is having trouble at 5,950 in the Futures while the Russell (/TF) was also a short at 1,430 last week and today they are struggling to hold 1,411 – another bad sign.  On the SPY ETF, you can see the volume melting away as we struggle along the $248 line.

 We've been talking about hedges and a good way to hedge the S&P, other than simply shorting /ES Futures with tight stops above, is a bear put spread on SPY options, which we can accomplish with the following:

  • Buy 20 SPY Sept $247 puts for $2.50 ($5,000) 
  • Sell 20 SPY Sept $242 puts for $1.35 ($2,700) 
  • Sell 5 TEVA 2019 $20 puts for $4.40 ($2,200) 

That spread is net $100 and pays $5,000 (up 4,900%) if the S&P drops below 2,420 (2.5%) into Sept expirations.  You have an obligation to buy 500 shares of TEVA for $20 ($10,000), but that's a stock we really love at this price so, essentially, free money for promising to buy it.  Ordinary margin on the short puts is just $900, so it's a very margin-efficient way to raise cash but you can use any stock you REALLY want to own as an offset.  

That covers us through some August uncertainty without risking very much (other than owning TEVA) and it's one of the main ways we like to hedge for the short-term.  It's much less aggressive than our longer-term ultra-short ETF long spreads, those provide the bulwark of the protections for our long-term positions.

For those comfortable playing the futures, however, nothing beats a straight-up bet on the indexes as long as…

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