We expected a rally but it didn’t happen. Still, we were able to realize $650 using a bull put spread options strategy betting the market would stay above SPY 225 by Friday expirations – kind of like selling insurance.
The bull put spread is an options strategy different from the long call strategy in that it does not require the market to rally a lot to make money. As long as the market stays above a certain level, then money can be made. The risk is if the market drops quickly, then the short put spread loses value quickly.
As a precaution, we exited half the trade early as we saw some short-term bearish signals appearing — hence the $650 instead of the max $900 profit.
Net credit = $0.63
Option Strategy: Bull put spread (a type of vertical credit spread); December 23 225/220 short put spread
Quantity = 15 option spreads
Max profit = 15 * $83 = ~$900
Realized = $650 (exited half early)
Pattern we predicted: Rally out of Triangle (learn more about this pattern in the members section) – (did not happen as predicted)
Entry Date: December 19
Expiration Date: December 23
Days Held: 4
Since the rally stopped and the Fed made their interest rate announcement of raising rates for the 2nd time in a decade with language suggesting 3 times more for 2017, the market stopped rallying and has formed a textbook triangle.
We’ve seen this triangle before – of course it’s easier to spot after it has happened. But the pattern has formed.
Last time this happened, we attempted a rally up – but then hit resistance, and then we drifted lower into the November election until it popped back up.
On September 22, 2016 – a triangle also formed according to the upper left of the below possible triangle patterns (Bull Market – Contracting)
Back on September 22, 2016 S&P Hourly Chart – A Triangle Also Formed
Notice how the zig zag patterns between a-b-c-d- contracted according to the textbook diagram.
We ended up hitting resistance in the 2170 region and then turned back below 2100 – before reversing for a rally.
So the attempted rally became a fakeout B-wave. And then extended decline into the election was an extended C-wave.
Similarly, with today’s market, we attempted a rally – but it didn’t follow through into Christmas. Instead, we pulled back but have held above support so far — suggesting a C-wave retesting support.
The main question now is whether C completed -or whether we hit resistance at 2261 and come down to 2238 before the rally resumes. We should know by Tuesday whether 2261 clears or not.
Another possibility is the blue A-B-C-D-E larger triangle where if we break 2265 but struggle at 2265 – that could lead to another several days of no action.
If I were to look at Dow and Nasdaq – those are giving hints that it should be able to clear 2261. But the Russell looks less favorable. So hard to say, but should know with a little more market action.
A reminder that on Monday, the 26th, the general market is closed. The futures will continue to trade. Due to this, my hunch is we will see a larger degree triangle form so I don’t expect the market to move much into the Tuesday session
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