1:10pm (EST)
One job you do not want is Ben Bernanke’s job…
It’s rare we get caught up in watching a grilling in Congress but we happened to catch a little of today’s Q & A session with “Big Ben” and the Senate Banking Committee. At one point, after being blasted by one Senator for a lousy job he has done, it looked as though the dude was getting choked up. But, he didn’t flinch and kept on taking shots.
We aren’t here to judge if has done a good job or not but we do like the composure he shows. He may not be the real “Big Ben” but he is the one quarterbacking our economic recovery…
The Dow is currently down 12 points to 10,440 and has struggled with direction today. The index has popped over 10,500 again and has traded to a low of 10,409. It still feels like the bulls are in control and they could carry us to a “Santa Claus” rally over the next few weeks.
Our near-term target still remains Dow 10,800 and we have been pretty good with market direction all year. However, as good as the charts look we still believe we are headed towards some kind of pullback. It may come in January or it may come after Christmas but until it does we have to trade like we are in a bull market.
This doesn’t mean we aren’t keeping our eyes open for short positions. We think that given the current market environment it is especially important to carry a mixture of both call and put options in your portfolio.
There are a few stocks that are performing well this week and the action in Amazon.com (AMZN, $145.12, up $2.87) continues to attract buyers. We wanted to share some research with you on what we were thinking Sunday night in the Weekly Wrap and to what we mean by having both call and put options in your portfolio.
As we were doing the Weekly Sunday night, Amazon was at $131.74 after dropping nearly $3 from last Friday’s Dubai debacle. We had in our notes that if the stock got to $135 it might be good for a “strangle” option trade.
This is where you buy a call option AND a put option that are slightly out-of-the-money and in this case we were looking at the December 140 calls (QZNLH, $7.90, up $2.10) and the December 130 puts (QZNXY, $0.77, down $0.18).
Folks, the December 140 call options closed at $1.54, down 36 cents, last Friday. There were 2,500 contracts that traded hands. The December 130 put options closed at $3.70, up $1.06, that day. Volume hit 2,000 contracts.
Now, here is where you make money with strangle option trades. We KNEW Amazon was going to run up really fast or go down hard based on the holiday sales figures. It is a no brainer because the company is tied directly to the holiday shopping season and online commerce. In other words, we could almost taste a “no-risk” easy money trade and we were licking our chops.
We should have profiled the trade on Friday but there was too much panic for us to release a trade on a day like that.
But let’s break this down in layman’s terms.
Together, those two options would have cost you $525 to buy one call and one put option. The key is that we knew there would likely be a 10% move in the stock based on the onslaught of news due out this week. The object is to make enough on one side of the trade to cover the cost of the other side of the trade. Price direction doesn’t matter.
Well, today Amazon.com is pushing $145 and we got the 10 or 15 point move we thought we would. The $525 – investment, risk, gamble or whatever you want to call it – is now worth $867. If you closed the call options you would get $790 and if you closed the put options you would get $77. Everybody following us?
Folks, this is a return of 67% in just under a week. We use the word risk, gamble, or investment because we are not going to sugar coat option trading. It is fun, dangerous, exciting, risky and VERY lucrative.
The point is we are more than just an option trading pick service. We want to teach you how to find trades and how to become a better option trader. The course we are preparing is almost complete and again, we are limiting our membership to a select number of subscribers. Hope on the bus, Gus, or get left behind…
We wanted to show you today’s example because we feel there are more trades like this coming up and we will be profiling these types of trades in our Members Area. But you have to be careful with them.
It would have been nice to have gotten everyone in the Amazon.com call options straight up last Friday. It would have returned you over 425%. But, even we wouldn’t have bought the call options straight up last Friday without some protection. It was such a short day of trading and the weekend was coming up. Add the Dubai uncertainty with it and you can see why we didn’t pull the trigger on Friday.
In any event, we do have some updates for our current trades which you can access right now by going to the Members Area…
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