originally published Wednesday, July 31, 2019

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All Traded Options

The charts we will look at in this update suggest that this is a perfect shorting setup that you see “once in a blue moon”. On the 3-year chart for the S&P500 index we can see that it has essentially been trending higher all year, but has now arrived at an important double target – at the upper boundary of its giant broadening pattern, which may also be called a bullhorn or megaphone and is normally bearish in purport, and also at the top of a Dome pattern. It is no coincidence that it has arrived at these targets at exactly the time of a Fed statement (today) and since it has risen ahead of this meeting this should be a classic “sell on the news” event, especially if the Fed only does a 25 bps reduction in rates, as the market will have discounted it. If they do the “full Monty”, a 50 bps cut, while it may superficially be viewed as music to the markets’ ears, then the market may construe it as the Fed seeing something bad coming down the pike, making it feel moved to use up all its ammo. So this is probably going to be a lose – lose outcome for the markets.

A perfect vehicle for speculators to use to capitalize on the drop that is thought likely to gather momentum after the Fed statement is SPY, whose chart for the same timeframe is shown below. The Puts in this are very liquid with narrow spreads. There are several approaches – one is to buy a stack of cheap near expiring Puts and then “keep your fingers crossed” , next is to buy expiries further out, which are more expensive but have more chance of success, another is to sell nearby Call strikes, buying in addition a higher strike to limit loss if wrong, and still another is to do a straddle which is a combination of Calls and Puts – the trick here is to only buy sufficient Calls to cover your Puts loss if the trade doesn’t work out. A Put that we will light on as an example to track the performance of the trade is the August 28th expiring $290 Puts which is at (last trade) $1.31.

Keep in mind that if the Fed does drop rates by 50 bps we might see a whipsaw where the market spikes briefly and then does an about face and drops hard. If this happens, ride it out.

IMPORTANT FOOTNOTE: the options trades suggested here should only be considered by those with the requisite experience in this area.

End of article.

Posted at 1.40 pm EDT on 31st July 19.