April 6th, 2023

Stuck In The Middle With You

Same story, but different day.  Yesterday’s down day was blamed on the ADP Employment report, showing a slowdown in private payrolls, from 242,000 to well below the consensus range, settling at 145,000.

Despite being a shortened week and one with relatively few reports, the market has used just about every report as proof that the economy is slowing and the recession will hit soon. Yet, some stocks and major indices are trading in bullish chart patterns with higher highs and higher lows on the longer-term charts.

Those trading the long game should be excited at this opportunity for the market to reset before the next leg goes higher. Yes, the reports this week contained mostly bearish results, but that should help inflation fall and the faster that happens, the faster the Fed may consider putting rate cuts on the table.

Here is the S&P 500 (SPY) weekly chart and it shows that we are making progress, heading back up to the previous swing high, right around $420. That’s the next line in the sand to keep this rally going. Even if we have a down week this week, we are still moving in an uptrend.

As I wrote yesterday, the week prior to the Easter holiday has some bullish seasonality bias, but we’re looking like we could close lower this week. The only hope to close in the green this week will be left to today’s trading.

History is on the side of having a bullish day. There’s a better than 65% chance that we close higher going into the extended break. What could stop that from happening?

It’s mostly the Nasdaq 100 (QQQ) that has been holding back the broader market.

It’s not the QQQs fault – it’s just trading at the top of its uptrend channel on a weekly chart. It’s the natural flow and the market and could see downward moves from here. If the chart pattern breaks and moves higher, the next potential resistance is around $335.

Where does this put us?  Well, we’re stuck in the middle.  Bullish weekly trends, but weakness in the QQQs and maybe some resistance coming for the SPY.  Of course, the upcoming earnings season may override any chart pattern.  Enjoy this lull while it lasts.

When the market takes a vacation day, I like to trade an S&P 500 (SPX) calendar spread.
I will set this trade up at 2 pm EST the last trading day before the extended break. Since I’m writing this before 2 pm, I will use current prices as an example, but you’d adjust the trade based on the values when you place this trade.

EXAMPLE SETUP:

Sell the at-the-money put with 14-APR expiration
Buy the at-the-money put with 28-APR expiration

At the time of this writing, the at-the-money puts are the 4090 puts, so the trade would look like this:

Sell to open the 14-APR 4090 put
Buy to open the 28-APR 4090 put

A debit of around 21.20.

Yes, it’s a big one, coming in at around $2120 per calendar spread. You can try with something like the SPY ETF, which is 1/10 the size of the SPX.

Why do I like this trade? Head to the SPX options chain and look at the 10-APR (next Monday) expiration. The market is expecting a +/- 50-point move.

Now, let’s look at our risk graph and do some price projections of what the calendar spread may look like on Monday when the market reopens.

If the SPX moves lower by the projected 50 points, the spread could potentially have a $120 profit. If the SPX moves higher by the projected 50 points, the spread could potentially have a $290 profit. And if the SPX stays at 4090, the spread could potentially have a profit of $480 by Monday. Again, your prices will be different depending on when you place the trade.

Since the sold put expires next week, I want to close out of this trade on Monday. However, you can certainly roll this trade another day or even a week, but that wasn’t the intent of the trade. This is a trade to take advantage of the extra time (theta) decay with the market closed for a holiday.

As a reminder, this is for educational purposes so please try this out in a demo account, especially if you’ve never traded the SPX, or a calendar spread before. This trade doesn’t always work as expected.

I hope everyone enjoys the extra day away from the markets – whatever you may do. I’ll be back next week!

If you have any questions, comments, or anything we can help with, reach us anytime.
Email: [email protected]
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.