Check out TBT, the Treasury Bond Inverse ETF. As we’ve described before, TBT trades in inverse to bond prices, which themselves typically move inversely to major market levels, so TBT can be seen as a symbol correlated with SPY, DIA, and other major market ETFs.
Here we’re seeing the highest prices in TBT in more than a year, which corresponds with general high prices in the markets. We think that TBT is less likely to continue upward in the near future, due to selling pressure in the markets and likely buying pressure as bond prices fall. For that reason we’re pretty strongly considering a trade in TBT, perhaps a bear call spread, or an Iron Condor. It’s worth noting that there’s a pretty well-established range here, and that TBT is on the high end of it, so an aggressive bearish trade (paying a debit for a bear put spread or butterfly) could also be a candidate.
A quick check-in on NFLX: NetFlix bounced off its earnings-cycle lows and is now firmly in the middle of its recent price range, leading us to take our prospective bullish trade off the table, at least for now. We thought that we might see the stock hover for a bit near its lows, and possibly dip to close a narrow gap between earnings cycle prices, but alas, we weren’t given a continued purchasing opportunity.
Now we watch to see if the stock trades higher or lower in coming weeks, and we’ll wait patiently for another chance to trade this near one of those extremes.
First Solar (FLSR) is one of our favorite stocks to trade because of it’s historically high prices and immense volatility. The stock is prone to 10% swings occasionally, and they’re generally well-set-up, so we can attempt to trade ahead of the trend.
We were, however, a little surprised at the magnitude of today’s drop, and it creates an interesting new opportunity. If the stock bottoms here and trades for a few days around the 50-day simple moving average then we might have enough justification to buy a call spread or covered call, depending on the premiums in call options. It’s certainly not out of the question to expect another upwards move in the near future, and we wouldn’t want to miss on the nice premium that comes with large, fast drops in price.
Again, stay tuned, we may have a trade out on this early next week!
NetFlix is showing a little weakness after some sideways action, and we’re interested to see which, if either, of these two gaps are filled in by a downward move in the near future. There’s a strong argument that we’re seeing the lowest point for NFLX’s price, because of support from the 50-day simple moving average and the previous lows this earnings cycle, but if the stock were to fall, it’s got two relevant targets: $200, the high from the previous earnings cycle, and $180, the low point of the earning-release gap from April.
We’d love a good chance to enter into a trade in NFLX, as the stock is known for high volatility and significant swings, making it a playground for options traders. We’ll keep our eyes peeled and let you know if and when we decide to move on a bullish or bearish trade here.
Cliff’s Natural Resources is a must-watch for us because of the implied volatility levels that continue to offer high-premium options sales in far out-of-the-money strike prices. This is the kind of thing we look closely for, but we don’t want to be too hasty. We’ve already had one successful trade in CLF (a VERY short-term trade that netted us a pretty penny), and we prefer to not go to the well too often. Here we’re looking at perhaps another naked put sale, in an attempt to collect some premium while the world continues to predict future price swings and their magnitudes.
If we do trade this stock, we’d do so in small quantities, at least at first, as high-volatility stocks tend to swing wildly, and capital at risk is an especially important consideration.
We posted about UNG’s touching of its 200-day simple moving average last week, and promised we’d follow up after the stock settled down a bit. Here we’re seeing a cross below that average, and a consideration of its cyclical tendencies leads us to believe the stock may have a few more dollars to drop before returning northwards.
If you’re long UNG now may be a good time to consider selling premium to attempt to reduce your cost basis. If you’re short UNG, it’s not a bad time to take a partial gain and continue to hold a position. We’re neither long nor short, but we are considering taking a new position in this Natural Gas ETF. We’d like to see a little bit more of a down move to get implied volatility up, then we’d be happy to sell puts underneath our identified support level.
Behold, AAPL prices are beginning to show signs of bullish preponderance… and we’re beginning to believe that the innovation corporation is going to ride new products to higher share prices soon. Besides the fundamentals (check the E3 release for new Mac products, they look wonderful!) we see support in technical indicators as well.
Here we’ve got two lines converging, a long-term declining trend line with a previously-established medium-term support level. These points are meeting just as the stock’s price is settling on the 50-day simple moving average, which gives us the hunch that the stock may be ready to start a summer-long recovery. Come Christmastime, we wouldn’t be surprised to see the stock well above $500 per share again on strong sales and renewed faith in the company’s ability to create new industries, not just new products.
This may be a stretch in terms of the meaningfulness of long-term support, but WLT (Walter Energy) is trading near its 2008 lows - around $11-$12 - and we think that this support may be meaningful enough to enter a naked put position. We’re not entirely sold on this yet, and will wait to see if the price drops a little closer to long-term support, but we’ve got this on our watch list and we wanted to share it with you.
If you’re considering trading this stock, pay close attention to energy prices in general, and be wary of short strike prices too close to the money. When we look at trades like this we try to have a short strike or breakeven price at or below the presumed level of support, which in this case is about $11.15 to $12.00, so keep that in mind while analyzing your trades at home.
We’ll look again Monday - given the time frame of this chart, we don’t expect this opportunity to disappear overnight.
Here’s one of our favorite ETFs to follow, UNG - the Natural Gas Exchange Traded Fund. We’re seeing another important crossover, as the price of the ETF is dropping below the 200-day simple moving average (SMA) for the first time since March, effectively ending what had been a pretty prolific run in gas prices.
We’d normally jump on this as a chance to enter a bullish trade, expecting that the 200-day SMA would exist as support, but due to the at-times-extreme cyclical nature of energy and gas prices, we’re holding off until next week to see how the price responds to technical support.
In other words, we want to trade this, but we need to see some confirmation of support before we feel comfortable entering a trade. We’ll sit the weekend out and watch futures prices move, then revisit this Monday or Tuesday morning.
This chart of UNXL was included in our recent Options Strategy Alert trade, and we’re showing it to you in an attempt to explain trading based on technical indicators and timing.
As you can see on the bottom half of the chart, UNXL had an extreme implied volatility spike as it dropped from $40 to $15 over the course of a few months. This kind of activity placed it squarely in the center of our radar, and we sold a 7.5 Naked Put in an attempt to profit from extreme implied volatility and the high prices across all strikes that came with it.
We ended up taking a $0.20 profit on a buying power effect of $75 per contract, good for a 27% return on margin in just two days. The stock moved sideways over two days, but implied volatility dropped from 187% to 162% - that 25% difference is much higher than current SPY implied volatility, for reference.
This decrease had a major effect on the prices of far out-of-the-money options, like the naked put we sold, and because of this we were able to take a quick, large profit, all because we were paying attention to the right indicators and set ourselves up to take advantage of our knowledge.
We’re not saying it’s always right to trade high-volatility stocks, but when we see an opportunity to sell far OTM strikes with high premium in the short term, on options with a tight bid/ask spread and with a low cost basis to go with it, we’re usually going to jump on those opportunities.
This chart shows Australian Dollar Futures on a two year chart. If you’re using thinkorswim, the symbol is /6A. There’s a lot to notice here, particularly how the futures have plummeted recently and are now sitting on long-term support. Australia is an economy that relies on commodities and mining, though it has a history of easing its interest rates in order to keep its exported materials cheap in terms of other currencies.
We’re not trading futures with our members, at least not yet, but this is important as we keep an eye on global trends and look for buying opportunities in US miners and other commodity-affiliated companies.
Yesterday we alerted our members of our closing an SPY 166/168 Bear Put Spread at a $0.38 per-share gain, or a 37% gain in only four days. Here’s our analysis of SPY on May 30th, when we entered the trade:
SPY as shown significant volume on recent sell side session as noted by the gray oval in the 9-month chart of SPY below. We believe the recent high of 169.07 may be a short term top, and SPY may correct back down towards the uptrend support line it started approx 6 months ago. With volatility at 14% (near historic lows) and a moderately bearish assumption, we decided buying a 2-point wide around-the-money Put spread in SPY made the most since given our assumptions.
As it turns out, those assumptions were more accurate than we expected, and we were able to close a trade (made on Thursday) out on the following Monday for a significant gain, in an ETF that isn’t known for extreme volatility. This is a product of a few of our beliefs - first, that when an opportunity presents itself a trade should be taken, and second, that when an acceptable exit is available, in most cases it should also be taken (unless there’s some compelling reason to wait).
It seems simple, but the truth is, many traders succumb to “analysis paralysis” and fail to place trades when the trade is perfectly acceptable. We’re happy to have taken a nice gain in a short time frame, and our members should be happy as well!
Gold bugs may not like this, but we’re seeing volume and moving average indicators that make us think gold will be relegated to the highlighted price range for a few weeks. GLD, the Gold ETF, made a valiant attempt to close its price gap after a big drop, but was stymied and fell back to its lows.
That retreat and the volume that accompanied it leads us to a certain sense of confidence in predicting sideways motion for a few weeks. We’re not necessarily interested in putting out a trade on this, but if you’re in to short term or weekly options, you may be interested in an iron condor, or maybe a wide-wing butterfly, a straddle around 130 and 138.
We’ll revisit this after a few more weeks to see what gold has done, and if we still think sideways is the way we’ll think about putting a longer term trade one.
This is a four-week chart with one-hour bars of FNMA, Fannie Mae - the famous lending agency that made so much news for failing during the throes of the financial crisis. Lately the stock has been all the news, with reports of accelerated government loan payoffs driving shareholders to gobble up low-priced equity. This is one of the more volatile months you’ll ever see in a stock, particularly for one that’s so well known (not a penny stock).
A lot of the volatility you’re seeing is because of mixed signals being sent about the long-term viability of the companies - there are rumors that the government may or may not follow through on its plans to shut down Fannie Mae (and sister company Freddie Mac) after its bailout loans have been paid back. Obviously a forced shutdown of a profitable company is a detriment to potential shareholders, so there’s a great deal of confusion as to the security of long-term cash flows, the primary determinant of current stock prices.
If you want to trade this stock, go for it. You’re not going to get a lot of advice from us, as there are no options to use and this one is way too hard to predict - government regulations aren’t our specialty, and there’s way too much confusion to make a serious prediction as to future performance.
Chesapeake Energy (CHK) is a company that’s previously been on our radar, but that we haven’t looked at closely in a few months. The stock’s had an impressive year, rising nearly 40% before giving back most of those gains, and now pressing up to the same highs. While we’re sure that energy bulls are ecstatic at the prospects of runaway profits over the summer, we’re tapping the breaks and examining this as a potential bearish setup.
What we’ve got here is a possible double-top, and the possibility for a big pull-back is very, very real. We’re thinking about selling high, something like a call spread with 24 as the short strike, in some expiration during the summer.
If we decide to place this as a trade for our members we’ll let them know - in the meantime, use this as a proxy for your analysis, and keep looking for strong price levels as useful indicators of good trade setups.