Discussion on Other Potential Options Trades

Question: I’m thinking about opening a SPY Oct 112/114 bear call spread.  Please give me your thoughts about this potential trade.

Response:  When drawing an upward sloping channel on the SPY it looks like 110 is the top of the channel if the SPY were to rally over the next week.   I think there is a low probability that traders will push the SPY up through the top of

the channel next week since many more earnings need to come out to give us an indication if top line revenue is beginning to grow.  (companies have cut their expenses to the bone over the last year, mostly by laying off workers, and analysts are now more interested in seeing top line revenue growing)   Next week we have the following economic and earnings releases:

Mon the 12th – Royal Philips Electronics
Tues the 13th – CSX (railroad), Intel, Johnson & Johnson
Wed the 14th – Abbott Labs, JP Morgan Chase, Grainger  (plus Retail Sales)
Thur the 15th – Citigroup, Goldman Sachs, Google, IBM (plus Philly Fed Manufacturing index)
Fri the 16th – Bank of America, GE, Halliburton (plus Michigan sentiment)

I wouldn’t be surprised if many of these companies meet expectations and guide UP for Q4;  and there is a good chance that the Philly Fed Manufacturing index will come in strong.  If so, the rally will continue.  And Tuesday (probably after the close) Intel will release their earnings and this could move the markets hard if they surprise us with an upside number.  I’ve heard/read that there is a lot of pent up demand for companies to refresh their computers….and Microsoft Windows 7 is soon to be released…so sooner or later we are going to hear from Intel that microprocessor demand is strong.

So, per your dilemma.  I think the 112/114 is not paying enough.  Right now its filling for 6 cents or so and the return is in the 2.8 to 3.1% before commissions.  I don’t think this is enough to warrant the risk.  Per the 111/113, this one is paying 11 cents and is returning about 6.3%.  This is much better.   Would I open the 111/113.   I might open a small number of contracts for sport, but that’s about it.  I don’t think the SPY will get there next week…but it is risky.

One last concern….the DOW is just dying to push up through 10,000.   Many times investors see this and artificially push it up over this threshold and then sell into the rally.