Below is a daily/weekly chart of Dow Jones Industrial Average ETF (DIA), $204.47.
Trade: Under $204.32, we recommend selling 10 May $208/212 bear call spread (30 DTE) for mid-point (currently $.77/share).
Technical Setup: Breakdown after bearish consolidation following Breakout Failure, price void below all time frames
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain on BCS: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $208.22.
Adjustments and Comments on Open Advisory Letter Trades
BYD – Bought 10 Bull Call Diagonal as follows: buy Jun $20 calls and selling May $23 calls for $2.05/share. Note: We typically like to leg into BCD but with earnings 4/25/17 and mixed market internals, we want to sell the OTM call immediately to generate some time decay and lower cost basis of long call. Move stop loss $21.18. Note: earnings 4/25/17 so holding is higher risk.
GNK – Bought 1,000 shares of stock at $14.40 and another 1,000 shares at $13.84/share for an average cost basis of $14.12. Note: Earnings are 5/8/17 (estimate) so higher risk holding through it. Target: A very aggressive $20.00 – 35.00. Stop Loss: $11.48.
TLT – Sold 10 May $119/114 bull put spread for $.59/share. Move stop loss $123.48 to protect gains, and bid $.10/share to close.
HD –Sold 5 May (5/5 weekly) 150/155 bear call spread for $.68/share and sold other half lot at $.55/share. Stop Loss: $150.22.
LOW – Sold 10 May 85/90 bear call spread for $.32/share. Move stop loss $83.22.
QQQ –Sold10 May 134/138 bear call spread for $.71/share. Move stop loss $132.52.
XLV – We did two trades depending on your trading preference: (a) shorted 1,000 shares of XLV at $73.77; and (b) sold 10 May 75/78 bear call spread for $.49/share. Stop Loss: $74.72.
TZA – Let’s cancel for now since we got into IWM bear call spread.
DG – Let’s cancel for now but will watch.
IWM – Sold 10 May 139/144 bear call spread for $.76/share. Stop Loss: $138.22.
NFLX – Sold 10 May (weekly 5/5) $150/155 bear call spread under 10-Min. low for $.48/share. Stop Loss: $149.22.
GNC – 10-Min. high triggered so try to sell 10 Jun 7.5/5 bull put spread (58 DTE) for $.35/share (mid-point dropped to $.30/share). Stop Loss: 7.48.
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director and Pristine Founder
Dan Gibby
Chief Options Strategist
Follow Greg on Twitter and StockTwits to get real-time updates:
Twitter: @GregCapra
Stocktwits: Greg_Capra
