Stock Quotes in this Article: CF, GS, QQQ

WINSTON-SALEM, N.C. (Magnum Opus Financial) -- Hello and welcome back to Lunch @ the Market. What a week it has been. It certainly feels odd to be looking for red on our screen to be green in the portfolio . . . but that is what we are getting all this week.

We are happy to be on record from much higher in the S&P 500 telling you that we took our profits on successful long (and bullish) trades from lower levels. But, we were on wave four of up moves from the initial plunge to 1120 and our comparison to 1998 said that we will eventually retest the lows we saw back in early August before technical traders can “trust” that a bottom has been put in. If we don’t hold that 1101 level (after probing below it, say to 1080) then there is a lot of air under the market all the way down to 900 in the S&P or so.

There is a lot riding on next week with the Barack Obama speech, economic events in Europe and drama that we don’t even know about now. Until there is a marked and measured change in the climate of Washington, toward business and Europe feels like we don’t have to revisit this “Euro Crisis” it’s possible to believe that we simply drift lower until stocks get so cheap (think about valuations in the single digit P/E range back in March of 2009), that it just makes sense to buy because the world isn’t going to end and in 2013 we could have a new president.


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    This morning, when the VIX shot up and panic was near it’s highs, we did a few trades in the NWATrading Chat Room. We sold QQQ 53 puts that expire today against our QQQ long October 53 puts for around $0.18. We still have a few hours to go, but if we can hold where we are at into the close (heck, if we can just hold 53 on the QQQ), then those puts will expire worthless this afternoon.

    The goal on doing this is to continue to reduce the cost of the long puts we own out on the calendar. If we can do this each week, until we see how we react to 1101, then we can have a very inexpensive bet on the downside. Only after the market probes that 1101 level do we really want to think about a trend reversal (which is down right now).

    The other move we made was to take the September 110 weekly puts that expire today and rolled them out to next week. The S&P 500 will need to fall an additional 78 points before those short 110 puts become an issue. And, considering our long 110 puts expire in October and our long 120 puts expire in November, we have weeks and weeks to sell weeklies against theses puts to reduce our cost of the trade.

    We made one more swipe at CF Industries (CF)again today. Near the open the stock was down about $4 at the lows. This time we were able to get the Septemer 155/160 Mirror Spread for $3.95. The stock doesn’t give you the most time to react (strong buyers interest on this stock), so for the actual timing of the trade and the prices paid you’ll need to check out the Chat Room over at NWATrading. CF has recovered nearly all of its loss on the day and is only down about 0.5% as of the time we wrote this.

    Our GS short Mirror Spread has worked terrifically and the stuck is now under $110. If you don’t want to risk some kind of snap back next week with all the leaders of the world speaking, you can take that trade off for a profit.

    Thanks for joining us again on L@tM. We hope you were able to capture much of this downside move. Sometimes it takes real courage to be a Bear . . . especially if you’re used to playing from the long side. If you are not able to “take the other side,” it’s best to take your longs off above 1200 and then you can look to reenter back down near the bottom of the range around 1100. Just be care of breaking below 1101 if we don’t get anything material out of Washington or if CEOs try to temper investors by taking down guidance during October’s Earnings Season.

    Enjoy your weekend and we’ll see you after the Holiday. Have a safe weekend!

    Brad Kelly is president, founder and portfolio manager for Magnum Opus Financial, a Registered Investment Advisory firm based in North Carolina that serves clients in 10 states. Kelly has been trading for 10 years and managing money professionally for clients for five years. He is president of the Piedmont Club Men's Investment Group and frequently is a guest lecturer at University of North Carolina Greensboro, in the finance department.


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