A few days ago I wrote about how the big price drop in Crude Oil and the parallel shift down in gasoline prices was affecting consumer spending. Long story short is that since this savings comes in at about $7.50 each week, no real traction would ever be made. What are we going to do, buy an extra cup of coffee and a muffin once a week? Courtesy of the US Bureau of Economic Analysis (BEA) we got the first revision of consumer spending. We see that in Q4 2014 "Americans spenteven moreon healthcare, pushing the total up by $1 billion more, to a whopping $21.4 Bn, or 18% of all spending on goods and services." When we are asked where the "de facto tax cut" that Americans got in the form of lower gas prices went and why Q4 retail sales were so dismal, let's take a look at this chart:
The markets finished lower on the last trading day of the month. As expected, we saw profit taking and stocks felt the weight of buyers cashing out. The COMP took the biggest swing down, as they have been the most bullish in recent weeks. Leading into the new month, I expect we continue this push higher. Expect the Nasdaq to make a run for 5k and more. Buyers will also be hunting for new all time highs in the other major averages also. It's been the theme in recent weeks, and it looks as if nothing will change that. The hunt for new all time highs will continue.
A few days ago I wrote about shorting naked options. We talked about the potential risks and rewards to this type of trading. What if you are uncomfortable (or unable because of capital limitations) to naked sell options but want to take advantage of an opportunity? There is a way that you can "kind of" mimic a short option strategy without having the unlimited downside potential. You can buy a wide butterfly or condor or sell an wide iron condor or iron butterfly. This will give you a small negative exposure to vega and will give you positive decay. Not as much as if you just shorted options, but beggars cannot be choosers. Here is the way you have to think about a signal like this. At it's core any of these set ups is simply a combination of put verticals and call verticals. Let's take a hypothetical example in company XYZ. There is a week to go until expiration and XYZ is trading $100. You could buy the 95/100/105 put butterfly for let's say $1.00 What do you really have on? You are long the 100/105 put spread and short the 95/100 put spread. This maximizes at the price of $100. Your long put spread will achieve it maximum value of $5 and your short put spread will have no value at a price of $100. So, you will realize a net profit of $4.00. So, this behaves just like if you sold the one week $100 straddle. Certainly you would benefit a lot more from selling the straddle on Monday and having it go out right at strike, but you would run the risk of a catastrophic loss if XYZ moves away from $100.
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