Capital Gainsville

Today is the last day of the third quarter and Thursday and Friday we have some big economic reports due out. Thursday we have personal income and outlays, jobless claims, construction spending, ISM manufacture index, pending home sales and EIA nat gag report. And if that was not enough Uncle Ben will be speaking at 9ET. Friday is light on reports but heavy on importance; employment and factory orders.

The market is starting to coil up like a tightly wound spring, and its ready to fire off, it just needs the catalyst. A few catalyst scenarios that I could think of all have to do with breaking a major support or resistance point. My thoughts are for a S&P 1100 before we have a correction of 5-10%. As far as the big employment on Friday I have heard estimates as low as 100K, which would be very bullish in my opinion.

MasterCard Idea

I have been trading MA for years and the best way to trade this underlying is with a debit spread. Price is sitting on a support point with upward momentum building like a bullet. I will be setting this trade today, but I will try to buy the spread a little cheaper.

Policy Failure Created Crisis

You Need Some Rocky Mountain Oysters

Over the last few months we have had 3 different occasions that we had a pullback of 3-5% before we went higher. Why should this time be any different? Well I could think of a few reasons, but in percentage terms I think its a great time for fund managers that did capture this move to take some profits off the table. One concern that I have is that volatility levels are lifting a bit, which means bigger moves one way or another. And for delta neutral traders, big moves will kill a good month. The $VIX the last couple weeks has been building a pretty solid base around 23-24, now a move to the 29-30 level I think is a good place to get short vega.

Below is a chart of the $SPX, and we are approaching a support level of 1040. A break of this level would make me believe that 1010 is the next level to watch. I was on the phone this morning with my dad that follows the markets and trades a bit, and he told me that on CNBC a technical analysis guru was on this morning and made mention to the rising wedge pattern the $SPX is forming. As I have said in the past the market can not and will not pay off everyone, and if this pattern gets more talk it probably will not play out. Be cautions of this pattern, it is considered to be bearish with volume trending downward throughout the formation. The volume will spike if price breaks through the up trend line. I would not plan for this pattern to play out just be cautious in case it does.

The Russell 2000 index is showing similar signs of this rising wedge formation. Now my thoughts last week was for the $RUT to pullback to the 590 level. As I type this we are 6.59 from getting to that support point I wrote about a few blog post ago. I feel today is the last day we will get negative price action until we retrace half the pullback. As for my positions I have been setting credit spreads on the $RUT in the low 500's high 400's. One nice thing is that today is Friday and probabilities and theta decay over the weekend is a great thing.

The Start...

Yesterdays post talked about the necessary pull back the market needs to have. Healthy sustainability in a trend needs to have higher lows and higher highs, and we are now waiting for a higher low. This is very basic chart analysis, but the important thing to remember is how today's bar closes. If the bar closes as a shooting star that could be our reversal signal and the start of our pull back. This could also be the start of some consolidation sideways action, but it seems that momentum is slowing a little.

Below is a chart of the $SPX

Mastercard and UNG

Last week I set two trades, the first was a cash secured put on UNG at the 9 strike and an ITM debit spread on MA. Today I closed both trades for 7% ROI. Today I will be looking for more trades to set for Oct and will continue to manage the rest of my open positions.

New highs are being made all over the place, but the one that I'm watching is the $RUT. Volatility is continuing to come out, but I would think that we will have a brief pop in volatility before the week is over. Considering that this is a triple witching week and we are starting to get long in the tooth, a brief yet small pull back is in order. When we get this pull back we have to be prepared to act, and act while you have the opportunity to set trades.

Below is the chart of the $RUT, and I think a pull back to the 590 level is not unreasonable. It might not be that deep of a pull back, so like a said be prepared to take action.

Double Dip, Not In My Salsa!

There is a lot of momentum in the market lately with trillions of dollars managed by hedge funds and institutions that have to make that money work. Institutions can not underperform this market, they have to show they beat the benchmark S&P 500 in percentage returns. And they can't do this if there money is on the side lines or they feel a certain way by staying short the market. As long as there is momentum in the market big money will be buying. But I do agree that the situation is still bad with housing, commercial real estate, credit and wages and job cuts. Momentum is strong and you should not fight it. This point brings me into a trade idea for Oct.

Info for Oct

Below are the strikes I am already trading for the month of Oct. The probability is the highest 510 and lower on the $RUT.

Lately I have been discussing what I trade and what I watch. I emphasized that traders need to trade the same underlying to really get good at trading. Below is the watch list that I follow everyday. Now I don't trade every one, but I like to watch some that I don't trade. The three that are highlighted are the main underlyings I trade plus the $SPX.

Debit vs Credit

I want to make a point to people that don't understand vertical spreads and what they might be missing.

Below is the risk profile of two trades on the $RUT. Now one is a credit and one is a debit, as humans we prefer to take the credit then pay a debit. But if you notice both have the same risk profile, but the debit will make you more money. The difference is .5 cents, if you did 50 of the debits you would make $250 more then if you did the credits. That's $3000 more each year you could capture if you were to review the difference between the two.

A Good Time

Today is marked by adding new positions for Oct. All types of strategies should be applied today. Verticals, calendars, butterflies, and even diagonals if your plan includes diagonals. Its hard to say where the market will head, but Fridays post was right on the money, we hit resistance. We could pull back from here, but I would not be surprised if we were to lift from these levels due to under invested retail and institutional investors. One thing to keep in mind is this Friday we have a triple witching which could make price action and market direction difficult to predict. Today I will be working on setting an income butterfly and some more credit spreads.

Resistance and Remembrance

National Day of Remembrance. To all our soldiers thank you for doing what you do to keep us free.

Today the market is hitting over head resistance of the 1040 level on the S&P. My thought is that we will receive a small pull back to the 1025-1030 level.

The rest of the day could be mixed, but I would think that people do not want to be long over the week end and will close their positions. I would bet we see a sell off at the end of the day.

Nat Gas

Everyone, even my dad has been wondering what the hell is going on with Nat Gas lately? I'm pretty sure its a supply and demand issue, but that's not important. What is important is that implied volatility is at the high end of the range for the year. IV on UNG had a high of 88% at the beginning of Sept and is now around 80%, that's a 8% decrease in the IV. Some people might say "So what Phillip, what does that have to do with me"? Well they might not know that when IV is high, option premiums are high and I think UNG capitulated. If you look at a historic chart of the $VIX it would travel between 15 and 30, 30 was a buy signal and 15 would be a neutral or sell signal. Now with the extremely high IV levels on UNG I think Nat Gas is done and will start to stabilize to slightly higher. Today I sold UNG puts at the 9 strike, with short puts you are short vega so if volatility continues to come out of UNG I will get paid faster. Plus the position is Theta positive.

Corn

Jumping Off a Bridge for Goldmen Sachs

Today I'm selling some puts on the financial giant Goldman Sachs. I am also selling some puts on MON.

Fund News

As of this month I have opened two new accounts. Sept was feared as the month we get our major pull back but my investors received 1.8% total return on their capital this month.

MasterCard....

The list of stocks and indices that I trade tend to have a slightly bullish stance over time. For example I have Amazon.com ticker AMZN on my list, and MasterCard ticker MA. Both of these stocks I feel slightly bullish on over the next 10 years. But as an option trader I don't really have 10 years more like 40 days. But I pick stocks that I would not mind owning over the next few years, and those are the stock that I trade. I bring this up due to the latest trade in my income portfolio. MasterCard has been one of my favorite trading vehicles and I know this beast fairly well. Today I purchased a call spread on MA.

Calendar vs. Short Puts

I trade a handful of underlyings and Goldman Sachs is one of them. Over the past two months this stock has not done anything. Credit spreads, calendars spreads and short puts worked out great, but the price action is getting closer to the uptrend line that started at the beginning of the year. Whats next for the financial giant? Implied volatility is at the lower 1/3 of the volatility range and the stock is channeling, both are ideal situations for a calendar spread. But I would rather find a spot that I would not mind owning this stock and sell a couple of puts. Below are the two ideas I have on GS.

Recap

People that trade for a living are under pressure all the time. A few bad trades might just keep you from paying your bills. But a few good trades might buy you that BMW you've been eyeing the last couple weeks. The main thing is being consistent, but being consistent is sometimes very inconsistent. Becoming consistent is a up hill battle that at first my be hard and sometimes frustrating, but it is something that all consistent successful traders have been through. Now a question that I have asked myself many times is "How can I become more consistent"? One thing that I did to become more consistent is lower my lot size. If you can not trade a 1 lot successfully what makes you think you will be able to trade a 10 lot. Start small and work your way up, another is trade the same underlying or index every month. By trading the same thing over and over again you will learn how it moves, how it acts and how it reacts. The reason I am talking about this is because I have a trade idea that involves one of the only underlyings that I trade the $RUT, and with a lot size that fits my management style. Over the next few years I will add to my lot size but for now this is good. With this strategy I am at a higher lot size then I was two months ago, this is good it is showing my consistency. But with other strategies like credit spreads or debit spread my lot size is much higher, like 130 times more.

Iron Butterfly on RUT

Commodity Shuffle

A nice three day weekend is practically here, volatility is dropping, equities are rising and bond yields are up. Labor day weekend is going to be a little less laborful, because today the market digested a 9.7% unemployment. Economist believe that the unemployment rate will continue to rise into next year topping out at about 10%. Now I am by no means an economist, but I would feel that this is a very bad thing. Now consumer spending counts for two thirds of our GDP, and with less working there will be more savings. Consumers will not spend there hard earned dollars like the burning holes we once were. GDP will in my opinion look so bad in the future that the dreams of hope and recovery will be crushed by false realities. I don't think that the market can just digest this situation and say "Well it will get better this is what was expected". And the only way it will get better is by more government stimulus. The economy is taking aspirin for a hole in the head. Now I believe in this country, I am not a doom and gloom believer, its just the reality of the situation is a lot worse then the market believes it is.

Swing Low....

In the start of May to the end of June everyone and my mother was calling for a head and shoulder pattern to take us to the double dip scenario. CNBC, Bloomberg and Fox business seemed to report on this technical pattern on a daily basis. Once the second shoulder formed bears started to short and the market did the opposite. The pattern was busted and we continued up. Over the years of trading and watching the markets I have learned that the market will not allow everyone to be right. That's why I like being a contrarian.

I keep hearing that this is the start of the next major pullback. But is there going to be a major pullback? I don't think so, I'm in the camp of a shallow side ways correction. Since all the major networks and blogs I read are all calling this the start of the major double dip correction it probably wont happen.

Worry on the Street

As an option trader there are a few things that I look at each and every day and one of them is Vega. In the option world I have been seeing a lot of volatility bulls (traders that want volatility levels to go higher) putting on double calendar spreads. These bulls are also bearish on the market, and are looking for the "double dip" in equities. A double dip would push the $VIX back to old high areas, and Vega long traders will be hitting grand slams. There are a few ways to participate in a rise in volatility. If you think we will have a double dip you can buy puts or you could buy a doublecalendar. Either way I think volatility levels are going to rise.