In the 2005 film 'Good Night, and Good Luck,' Edward R. Murrow is portrayed by David Strathairn (and brilliantly so, I might add) as justifying his cause for the persecution of Joseph McCarthy by saying "I simply cannot accept that there are on every story two equal and logical sides to an argument."
This portrayal of history reflects my vantage for the justification of the current levels of US equity markets which haven't seen a 10% sell-off since 2011. Now, its beginning to look like the argument for a technical correction is gaining favor. The facts that the S&P has tested its highs 5 times in the last 6 months, each time failing to break out, and bearish technical factors are quantitatively stronger (see below) lend favor to the case for a market repricing.
The bearish technical factors as measured on the SPY I referenced above are:
This being the case, I am outlining 1 long and 2 short trades.
First the long trade is on the biotechnology ETF, IBB. With a host of biotech earnings approaching next week, the ETF has a growth catalyst and it has recently reverted back to its expanding moving averages. Here's the trade:
Long the ETF at $381.35
Long the September $360 put at $8.90
ETF to option ratio of 50:1
The put gives >13.5x leverage
The break even prices on the trade are: $399.15 (approximately 3 ATRs) and $320.85 on the downside.
The WYNN short follows a 5 month slide in the price of the gaming stock which has recently consolidated around $100. However, technical factors have caught up to the name and it reports earnings the first week of August. Here's the trade:
Short the stock at $102.92
Long the September $115 call at $2.49
Stock to option ratio of -33:1
The call option gives >10x leverage
The break even prices on the trade are: $95.45 on the downside (just over 2 ATRs) and $125.12 on the upside
The BBY short follows a similar pattern to WYNN. The retail giant's stock has been in a long term downtrend but is now showing signs of breaking out lower. Here's the trade:
Short the stock at $32.62
Long the September $35.49 call at $0.65
Stock to option ratio of -40:1
The call option gives 12.75x leverage
The breakeven prices on the trade are: $31 (a little less than 3 ATRs) and $38.49 on the upsdie
This portrayal of history reflects my vantage for the justification of the current levels of US equity markets which haven't seen a 10% sell-off since 2011. Now, its beginning to look like the argument for a technical correction is gaining favor. The facts that the S&P has tested its highs 5 times in the last 6 months, each time failing to break out, and bearish technical factors are quantitatively stronger (see below) lend favor to the case for a market repricing.
The bearish technical factors as measured on the SPY I referenced above are:
- All short and medium term moving averages are negative (20, 50 and 100 day MAs)
- The CCI (a momentum calculation) is negative
- The Moving Average Variance is negative - see the July 22nd post, 'More Details for AKAM Short...' for the explanation of Moving Average Variance
- The negative Moving Average Variance is widening. This may seem redundant but is actually a significant factor.
This being the case, I am outlining 1 long and 2 short trades.
First the long trade is on the biotechnology ETF, IBB. With a host of biotech earnings approaching next week, the ETF has a growth catalyst and it has recently reverted back to its expanding moving averages. Here's the trade:
Long the ETF at $381.35
Long the September $360 put at $8.90
ETF to option ratio of 50:1
The put gives >13.5x leverage
The break even prices on the trade are: $399.15 (approximately 3 ATRs) and $320.85 on the downside.
The WYNN short follows a 5 month slide in the price of the gaming stock which has recently consolidated around $100. However, technical factors have caught up to the name and it reports earnings the first week of August. Here's the trade:
Short the stock at $102.92
Long the September $115 call at $2.49
Stock to option ratio of -33:1
The call option gives >10x leverage
The break even prices on the trade are: $95.45 on the downside (just over 2 ATRs) and $125.12 on the upside
The BBY short follows a similar pattern to WYNN. The retail giant's stock has been in a long term downtrend but is now showing signs of breaking out lower. Here's the trade:
Short the stock at $32.62
Long the September $35.49 call at $0.65
Stock to option ratio of -40:1
The call option gives 12.75x leverage
The breakeven prices on the trade are: $31 (a little less than 3 ATRs) and $38.49 on the upsdie
Comments
Post a Comment