10/6/10 pre market analysis $spy

So today The Fed pumped a lot more money into this market, or as it’s better known POMO.  There have been rumors that the fed may begin getting into buying and selling equities.  If this happens this will be a disaster for the US economy, and all we can do is sit back and watch what Ben does.  Since he decided to pump all this money into the market a couple of things have happened.  The value of the US dollar has gone down, the value of gold has gone up, and generally speaking the SnP500 has gone up.

That being said, we have been stuck in a trading range, between 112 and 115 in the SPY for about a month now.  What changed today, fundamentally, nothing.  The Fed says its going to pump more money to prop up our economy.  Where are the new jobs going magically appear from to the over 10% unemployed in this country?

Here is the 3 day chart of the SPY, you see Friday which was Expirations Friday for the weekly options, you see Mon.  Then you have a huge gap up to tuesdays open where it opened on Tuesday morning 114.78.  it closed on Monday 113.78.  This is a point move higher over night, and this is a large gap that I believe will be filled in the next couple of days.

3 day chart $SPY

There are a couple of strategies to use if you are thinking 116 is a high for the market, which I do believe it is for the short term at least.

1. simply buy 116 puts- the weeklys are trading @ .85, this would mean you need the $SPY to hit 115.15 for you to break even by Friday.

2. buy a put spread: buy 116 puts sell 115 puts creating a spread. I did roughly a 2:1 put spread on the weeklys.  This is fairly risky, but also very rewarding if the market were to hit 115 by Friday, which I believe it will. so the exact trade is to buy 60 – 116 puts and sell 30 – 115 puts.  You can lose a maximum of 1170.  And you have no limit as to how much you can make.  The break even point on this trade is at 115.81.  If you believe that the $SPY will close below 115.81 by this friday, then this might be a good trade idea for you.

I like the put spread much more, than just buying the put.  The spread gives you protection, a maximum loss, and allows you to have some better risk/reward potential.

Let’s trade ’em good today.

Pre markets show the $SPY trading at 116.25 right now.

Lets see how this trade works out come Thursday or Friday.
I feel the SPX and SPY are due for at least a little pull back, which would be healthy for them.

Another motto to live by is to buy on the dips, sell on the rips.  As the stock market really ripped on Tuesday, it may be a good thing to be selling this rip, and watching it dip a little bit.

Just my 2 cents.

Trade ’em good.


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