Deep-in-the-Money Index Profit Jamboree! (SPY, DIA, QQQ)

It’s no surprise to readers of this space that the market has been surging of late, nor that the NASDAQ Composite is now pushing toward all-time, dot.com bubble highs.

Did we miss something?!

 

Last week marked a banner push for the S&P 500, its second best performance of 2014, with a rise of 1.7% over those five trading sessions. Last Friday also marked one of the longest streaks in that index’s history without a close below its 200 day moving average – a feat worthy of a bottle or two of the bubbly, in our estimation.

leo                                                         [Aw, shucks, guys. Come on.]
But that’s not the half of it.

The NASDAQ, too, as we mentioned, is setting new bull market highs and has now reached levels not seen since the end of March, 2000, just after the dot.com bubble popped and the slide toward tech infamy began.

The ‘DAQ closed out the week at 4538. Her dot.com bubble peak comes in at 5048, a mere 11% skip higher for that index.

Shouldn’t take too long.

No? How fast will we get there?

 

As always, the key to new market highs will be determined – in large part – by investor sentiment. So long as we see signs of trepidation we can rest assured that the current intermediate trend is still intact. And as it turns out, that may not be the case at present.

These are the weekly bull and bear numbers from the American Association of Individual Investors (AAII), a reasonably reliable contrarian barometer of the strength of the current intermediate trend.

And what do we see?

aaii825

We’re coming off a week that caused a very serious sentiment swing in favor of the bulls, and that’s never something we’re happy about when we’re long the market – as we are now.

In fact, the last two weeks saw a 15% increase in the number of bovine believers, the biggest fortnight leap for that cohort since last July. And at 46% we’re at the highest levels for the bulls in over a year (top red circle).

Coupled with the foregoing, we also have a severe contraction in the number of ursine beasts in the sentiment mix. Bears fell from roughly 39% to just over 23%, making for a decline unseen since October of last year, and causing the spread between the bulls and bears to fast approach levels we consider dangerous.

And it’s with that in mind that we have to consider the possibility of a weak week ahead of us.

brilliant

We’ll show you the charts for the indexes a little later in the piece, but we’ll just add for the moment, that for the last two months both the S&P 500 and NASDAQ are also showing signs of divergence between price action on one hand and their respective RSI and MACD indicators on the other.

And that, too, speaks to the potential for a ‘pause’.

In short, a gentle retreat would certainly not be out of order here.

Action to be Taken

 

Because we see an increased chance of a pullback in the days and/or weeks ahead, we’re going to recommend you review some profits you’ve garnered from a trade we initiated back on March 3rd, in a letter called As the World Wars, Wall Street Waxes.

There we deemed it auspicious to hop aboard the deep-on-the-money long CALL option train, and we recommended you do so with the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), a proxy for the Dow, and the PowerShares QQQ Trust ETF (NASDAQ:QQQ), the NASDAQ Composite’s equivalent.

The numbers break down as follows –

We urged you to purchase the DIA January 2016 120 CALLs, then going for $43.00 and the QQQ January 2016 49.63 CALLs for $41.77. Your total outlay was $84.77.

Today, the DIAs are selling for $50.50 and the QQQs go for $49.40. Sell them both and you walk away with a total of $99.90, or 18% on the trade.

And that’s pretty darn good.

We’ll likely have a chance to reinstate the trade in the event of a pullback, but for now we deem it wise to be out.

All the best and congratulations to those who got on board.

Another one Huey! Give us more money!

 

Happy to oblige.

We opened another long deep-in-the-money initiative on the 5th of May in a letter called Noah Would Have Bought CALLs. This time we employed the SPDR S&P 500 ETF (NYSE:SPY), but we added a twist. Along with the long DIM CALL, we had you sell a PUT with a nearer term expiry to help offset the cost of the CALL.

And it worked out delightfully.

The details are as follows –

You bought the SPDR S&P 500 ETF (SPY) December 2016 110 CALLs for $81.36 and sold the December 2014 SPY 170 PUTs for $4.15. Your total debit on the trade was therefore $77.21.

Today, the long CALLs fetch $89.28 and the short PUTs go for $0.99. Sell off the CALLs and buy back the PUTs for a total of $88.28 and your profit on the trade is $11.07, or 14.3%.

prettynice

Oh-so-nice…

 

Finally, we turn to a trade that we opened just a couple of weeks ago in a letter called A Pullback Begets a Bounce. There, we got very excited about the prospects of a bounce on all the major market averages, and we urged you very strongly to sell PUTs.

Specifically we said –

“Sell the DIA December 155 PUTs for $3.10 and the SPY December 174 PUTs for $2.81, for a total credit to you of $5.91 per pair traded.”

And by Jove, it worked.

Look at the chart –

dia825
After just two weeks, the indexes are back at their peaks and our trade has a very nice profit.

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Wall Street Elite recommends you 1) consider buying them both back for $2.88 and taking home $303 (591 – 288) per round traded, and 2) closing all your open deep-in-the-money options trades, as detailed above.

Shut ‘em down, gang. We did nice.
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Wall Street Elite recommends you 1) consider buying them both back for $2.88 and taking home $303 (591 – 288) per round traded, and 2) closing all your open deep-in-the-money options trades, as detailed above.

Shut ‘em down, gang. We did nice.
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The DIAs are going for $1.60 and the SPYs for $1.28.

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. martin

    Hello,
    When you post your recomendations on Wall Street Elite, you consider the % of the total portfolio to trade on each trade ? I nthis case of 10 calls on QQQ ans DA you sold, a portfolio of how much you are considering ?
    How many trades average you one and close ona month ? Thanks!

    • Stephen Dietrich

      Martin,

      Unfortunately, we don’t give specific instructions on our trade idea recommendations. We suggest all readers consult their personal financial advisor before engaging in any trades, and discuss what would be best for them.

      We average four trade ideas from the Wall Street ELite per month, sometimes a little more (but never less!)

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