Trade #4 — Semiconductor HOLDRS
Recommended by Serge Berger, The Steady Trader
We’ve had a good couple of days in the markets, and with immediate-term risk assets being quite oversold, the bounce we are seeing may have further to go.
Soon the question will become whether this bounce leads to performance-chasing (and hence a rally) in risk assets by fund managers, or whether the global growth slowdown and European debt issue will weigh even more heavily in the markets.
Right now, with volatility elevated, my trade idea involves selling options. In that case, I would like to sell far out-of-the-money calls, or call spreads, on the Semiconductor HOLDRS ETF (AMEX:SMH).
The semiconductor stocks often act as a leading indicator to global equities. And the SMH’s recent sell-off along with the market started at the resistance point at its 200-day simple moving average.
If global growth is to slow, then semiconductor investing should also cool somewhat … and charts like copper and the inverted yield curves all over the world are also confirming slowing growth. On a weekly chart, the SMH — along with the PHLX Semiconductor Index (NASDAQ:SOX) — is developing a major two-year-long head-and-shoulders pattern which, if it works out, would have a final price target near the 2008 lows.
So, in order to enter the trade, we need to see the SMH up somewhere between $30 or $31 (it’s at $29 and change, as of this writing), and we would then want to sell calls at least two months out (February or May) and about 5%-10% out-of-the-money.
When selling options, your broker will require you to have a margin account, so be sure to check with him or her before making this or any option-selling trade.
Alternatively, and especially if the SMH gets to between $31 and $33, we would also be happy to buy puts, as volatility would have come down. We would then buy May at-the-money puts.
Trade #5 – SPDR S&P 500
Recommended by Adam Warner, Options Volatility Trading
On Aug. 8th, the SPDR S&P 500 (NYSE:SPY) traded in an enormous range, with a high near $120 and a low near $112. It set the tone for a very volatile August, and a relatively active autumn overall.
But here’s a dirty little secret: Things haven’t actually moved much since then.
SPY breached to lows of that day in early August and then proceeded to rally to the $128 area, before settling back near $120 again. The market seems very volatile, mainly because we open with some relatively large gaps over and over again. But net-net, we’re churning more than anything else.
As such, I like the Iron Condor in SPY. To establish this position, you would sell the December quarterly 123-126 Call spread and the 115-112 Put spread, for a total combined credit of $1.75.
Think of this trade as entering both a bear-call spread and a bull-put spread. With both, you collect a credit upfront so you put more money in your pocket right away. It’s also a lower-risk way of playing a security (or, in this case, a market) that’s going nowhere.
The market will break out at some point; I’m just betting with defined risk/reward that it doesn’t happen in a big way before year-end.