In Fri’s Technical Blog we discussed the languishing price action at the extreme lower recesses of the past couple months’ range that warns of a resumption of not only Aug’s relapse, but the broader slide from 02-Mar’s 10.83 high. We anticipate a break of the obviously key 8.26 level that would expose indeterminable losses thereafter. And we cannot emphasize the term “indeterminable” enough. Below 8.26 traders should be prepared for anything between a collapse to the 7.00 OR a trickle through 8.26 before a huge about-face higher. What we know with specificity is where the market should NOT trade per any broader bearish count: above corrective highs and risk parameters identified at 9.22, 8.61 and even 8.52 depending on one’s personal risk profile.
Below the hourly, daily and weekly charts below we discuss cautious but favorable risk/reward ways to spec and/or hedge against whatever unknown the bear has in store for us below 8.26. And for you bull bottom-pickers, we tossed in a way to do so while still getting a good night sleep tonight.
BEAR HEDGE: SHORT NOV 8.40/8.60 CALL SPREAD – LONG NOV 8.00 PUTS
This bear hedge involves selling the Nov 8.40 – 8.60 call spread for around 8-cents and buying the Nov 8.00 puts around 8-cents for a net cost of even”. This strategy provides:
- a current net delta of -0.37
- favorable margins
- NO cost/risk if the underlying Nov contract settles anywhere between 8.40 and 8.00 at expiration 45 days from now on 10/26
- fixed, maximum risk/cost of 20-cents on ANY rally above 8.60
- virtually unlimited, dollar-for-dollar hedge protection below its 8.00 breakeven point at expiration.
BEAR SPEC: OCT 8.20 / NOV 7.90 PUT DIAGONAL SPREAD
This strategy involves buying 1-unit of the Oct 8.20 puts and selling 1-unit of the Nov 7.90 puts for basically “even”. This strategy provides:
- a current net delta of -0.11
- a little better than 2:1 gamma ratio
- negligible risk if the underling Nov contract rallies sharply
- profit potential of up to 30-cents if the contract sustains losses below 7.90.
As always, the gamma advantage from such diagonal spreads comes in exchange for theta, or time decay risk as the front-month, closer-to-the-money puts will lose time premium faster and at an increasing rate towards expiration than the deferred-month, farther-out-of-the-money Nov puts. If tomorrow’s report is a complete dud and the underlying Nov contract simply flat-lines over the ensuing week, owners of this spread run the risk of the long Oct puts expiring worthless with a remaining naked short Nov put that would expose infinite risk IF left totally unattended. Of course, we attend to this risk and advise simply covering this trade for what should be a small loss if the market doesn’t move sharply either way by roughly early-to-mid-next week.
Please contact your RJO representative for updated bid/offer quotes on these strategies.
For you closet bulls who’d like to safely bottom-pick this market, we’d suggest the Oct 8.50 / Nov 8.80 call diagonal for a 1/2-cent credit. Please see P&L graph further below.
