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Saturday, December 12, 2009

Walking through a Monday spread trade, XLE

Let's see if I can use all free tools to figure out my trade for Monday, I have space for two more in my margin account with Questrade and I am considering liquidating the TFSA positions and transferring the cash left into that account as well. Seeing as I really don't want to have to track those leftover positions that are from the previous advisory service and with year end nearing I will have that room to add to next year if I choose. If I withdraw it after December 31st then I cannot put it back in next year if I decided to.

So, Stockcharts.com for free P&F charts, annotating candle charts, relative performance charts, the CBOE site for option chains...that should cover it. I will use esignals for the candle charts as it is easier but I wouldn't really need to.

First up, the overall S&P 500 Bullish Percent Index (BPI) as a P&F chart.



I used a wider chart to get a feel for past years here. The BPI has only been in this range twice in the last 7 plus years...very overbought. The last time it immediately preceded the consolidation and drop into the 2008 year. This would lead me to consider wider ranges on puts or just selling calls to play the pending downside. I looked at these BPI charts some time ago but never got around to using them... options make these much easier to play I believe.

OK, looking for a trade in SPY is easy and I already have two in, one tight call spread and a wider put spread both meeting or exceeding my target credit. Let's look at another sector and see what we can scare up elsewhere...for diversity.

Putting all of the ETFs on a relative performance chart and jotting down the 30 day period performance (30, 60, 90 etc) results in Energy being the poorest performer over the last 200 days. the trouble is that the BPI in energy is in the low 40's so it is heading into oversold territory already...not necessarily the best time to concentrate on call spreads... the P&F chart indicates that the price is set for a support test on a current bull trend.

This is the trouble with relative performance. As much as it has been the poorest performer it does not mean that it is heading down, just not up as fast. So this leaves me sitting on the sidelines if I were looking to trade the ETF but I am not. It is not trending hard, the S&P is overbought, energy may wallow a bit while the S&P decides what is up. The dollar and oil are doing a dance right now as well. So let's get into the options.

Lots of options here. The January calls put me at $59 strike to meet my minimum target. Seeing as the price is at $55.53, about $3.50 difference, and is on the bottom of the linear regression channel and lower than the recent high in October this would put my call strike inside the upper channel area. I should look at the puts instead right now.

Much better. I get down to the $52 strike, still $3.50 difference but from the bottom of the channel which is around the low for September. Seeing as the strike is also near the 200sma, typical support.

Here is the XLE chart for reference

The way the short term trend is setting up it might appear that the price may head down. Given the last few down moves I think that the trade level given the timeline (red arrows) should provide enough of a buffer. If it does then I would watch for the longer term regression channel to level out and widen. This will give me the setups I would look for to set a call spread at an upper channel price.

Due to the nature of a spread, in that I am playing the difference of two strikes as opposed to the options prices themselves, I can afford to wait to see if an apparent support level ends up being support before placing the trade without too much worry of missing a good price. Of course if it takes a long time to do so them I will lose as the difference does get smaller as the prices depreciate.

The trade is to sell the Jan 52 strike. My spreadsheet gives me values for $1, $2 and $3 spreads. In this case the $3 spread provides the largest difference between the long and short quotes.

My trade:

Buy 4 Jan 49 strike puts, XLE MW
Sell 4 Jan 52 strike puts, XBT MZ
For a net credit of 30 cents (I can go as low as 25 cents and still hit my target, seeing as my goal right now is to get some trades filled and working I may go for the largest lenience)

Jeff.

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