The difference between the SPY June quarterly options and the regular June options currently ranges between $.40 and $.50 for calls and between $.50 and $.60 for puts. On Thursday I bought a fairly large number of those calendar spreads at every even strike price between 112 and 122 (using calls for strikes over 116 and puts for strikes under 116).
There will be 11 days of remaining life to the June quarterlies when the regular June options expire. I checked the prices of the May options with 10 days of remaining life to get an idea of what the June quarterlies might be worth when the regular June options expire. The time premium in the May options for an at-the-money call option was selling for more than $1.50 and for strikes $1 higher or lower than the stock price, the premium was $1.30. For $2 higher or lower strikes the remaining time premium was just over $1.00. Assuming that the stock ends up somewhere within the range of $112 to $122, I figure I have a pretty good chance of tripling my money on one of those spreads, and maybe doubling my money on one or two others. Even if the strike is 4 points away from the stock price, the premium was still slightly greater than the average price I paid for the spreads so I might break even on most of the remaining spreads as well.
With the market down 210 points on Friday I will probably add more calendar spreads at the 110 and maybe 108 strikes as well. The trick is to pick a wide enough range so that one of the strikes is very close to the stock price on June 19.
Of course, VIX might fall between now and June 19 and the option prices that existed last Thursday when VIX was 25 might not be there in June. On the other hand, VIX is now over 31, and if that is the case on June 19, the June quarterly option premiums might be even higher than the May options were with 10 days of remaining life.
Anyway, I think it is an interesting play and I thought I would share it with you. I think if I were to do it today, I would pick a range from 108 to 120 instead of the higher range I chose.
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 7 actual option portfolios conducted at Terry's Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you.
Terry
P.S. If you order the book no later than May 24, 2010, I will send you a copy of Making 36% by first-class mail for the total price of only $9.97. Order it here and use the discount code of VAL.
Before the trading week began, news of a European bailout sent the stock market futures significantly higher. As a result, the week began with a 4+% gap up. There were only six other times when the market gapped this high and each time a gap of this magnitude occurred the market closed the gap over the short-term.
The news carried the market higher 5.5% by Wednesday's close only to give back a good portion of the advance late Thursday and early Friday.
For the week the Dow, S&P 500, and Nasdaq were up 2.3%, 2.2% and 3.6%, respectively.
As I stated before, the early advance came on the heels of the news that came out over the weekend. All of the major indexes rocketed higher Monday and traded sideways for the next few days. The hope was that Europe's emergency loan package would prevent a debt crisis in Greece, Portugal, Spain and Ireland. However, enthusiasm regarding the plan wore off as the week progressed, as many analysts came to the conclusion that the $1 trillion rescue package could significantly slow the global recovery.
John Stoltzfus, an analyst at Ticonderoga Securities, said: "Markets that had rallied earlier this week have been paring those gains as consideration of the ramifications of austerity programmes tied to the bail-out on regional and even global growth are being weighed."
The President of the European Central Bank, Jean-Claude Trichet, was quoted saying that he still sees Europe's economy "in its deepest crisis since WWII, or even WWI.
"We need improved structures, to avoid and sanction wrongdoing," Trichet was quoted as saying. "We need an effective implementation of the mutual control, we need effective sanctions for breaches of the stability and growth pact."
Economic News At a Glance:
On the technical front, the major market indices are all in a neutral state so there is not a notable advantage to speak of on an oversold/overbought basis. The bulls failed miserably to push through the highs established early in the week. Strong overhead resistance proved too much for bulls and the bears gladly pushed the market lower as a result. The move lower has yet to close the gap from Monday so I would expect to see further declines over the next week or so, but over the very short-term I would expect to see a smallish bounce. If every bounce is met with sellers then we can expect to see a decent correction that could bring us back to the lows established in early February. Remember, this two month rally that we just experienced was on very low volume which means that there wasn't much conviction amongst most market participants.
Next week brings options expiration so it should be quite interesting to watch how the market performs.
Andy
Overbought/Oversold as of May 15, 2010
Major Benchmarks