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[denleo]

Well, no matter what kind of indicator you apply to the market and no matter how much experience you have, you know one thing today – the market is overbought! Put/Call Ratios, internals, oscillators or whatever you use… Great, now what?

The internal strength generated over the last few days tells me that the market will not just roll over and die. It can have a bigger than normal down day or it can just consolidate or it can ignore the overbought conditions for a while longer. The way I like taking care of this curiosity is to sell a vertical Call spread on S&P, preferably at a time when I’m thinking – Oh my God; this thing will never go down! Those simple tactics are usually good. First when I see a probability that the downside has potential on a short-term basis, why not make a little money on it. And Second, I clearly understand that I’m going in front of a strong trend, and in case the market continues to go straight up, I have a limited loss. I normally like to use options maturities about 2 weeks out in order to give myself some time, but not too long, because this is my short-term thinking, therefore I need sufficient negative delta. I also like to use strike prices close to the money or a bit out not to fight theta and knowing that I am out there to catch a high probability pull back, which means I have no intent to hold this until expiration. If I catch it and then the market crashes, it doesn’t matter to me. The plan is to potentially catch a pull back and be protected in case I’m wrong.

If I see an opportunity to do that I will update in real time as usual. I’m thinking selling quarterly June SPX 1950 – 1975 call spread.

One interesting note in market history: Last week was the first time OEX (S&P 100 index) closed at all time highs since the top of 2000. We are talking about the biggest and the best companies in the number 1 economy in the world. 14 years is nothing in terms of history, but everything in a life of a trader. That’s why traders who get married to one view or another for a long time limit themselves and rarely come out on a winning side. There is nothing wrong with having certain convictions; in fact, it is an essential part of confidence we need in trading. But imagine two traders made a bet back in 2000 on where Top 100 will be 14 years later. One is screaming – bull market forever, another one is shouting – this is insanity, we are all gonna die! Were they both right? Were they both wrong? My answer is – Both of them are idiots.

My worst year as an individual trader was 1995. Back then, having about 4 years of experience trading part time, I decided to be a bear. If you ask me why, I have no answer. I found millions of reasons in my head that this market would collapse. I can’t even remember why. Maybe it was something personal going on in my life or maybe I thought I figured something out, I don’t remember. Needless to say, I lost my account. I learned a lot, though. And there were times in my professional fund management life where I got stuck with certain views longer than was acceptable. I like the phrase: Change is inevitable, progress is optional. In a real world, traders are not evaluated on a number of good calls; they are evaluated on how they handle risk and losses.

IWM / SPY Spread was closed with a profit.

Open Positions:

Short SPY
Long SPX June 27 Weekly 1925 Call
(This is my short-term put. Considering the changes to this position over the last couple of weeks, it will be profitable if SPX falls below 1910 – 1920)

Long PAY July 33 Calls from 4.00

Long VIX October 20 Calls from 1.60
Short GLD from 120.55 (1/2 of a regular position)
Hard stop at 124.00

Short SNDK
Long SMH
Short from 2.066 ratio
Hard stop 2.27 ratio

Day Trading:

If there is a spike higher, I intend to sell a call spread as I mentioned above. This prevents me from day trading on the downside. If the market just goes down without a spike, I will try to scalp VXX once or twice. My confidence about tomorrow’s market is low; therefore I will keep it close to the vest.

Have a Profitable Day!