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Last week the market moved higher, yet the move was based on no significant newsworthy event(s). While we maintain a bias to the upside, and certainly believe that the market has room to run higher, we also believe that a reversion back to trend (bearish) is quite possible. For those investors that would like to scale into long positions, and may have missed the latest opportunity, we offer a hedged way to achieve that objective.

The hedged solution involves options to buy both a bull spread on an oversold pair of stocks, US Steel (X) and Ford (F); and at the same time a bear spread on the S&P 500 index (SPY).

$25,000 Sample Investment Allocation

Bull Spread

Buy 28 contracts X November 20C at $3.23

Sell 28 contracts X November 25C at $1.05

Net Investment w/o fees @ $2.18 $6104

Buy 133 contracts F November 10C at $1.05

Sell 133 contracts F November 11C at $0.58

Net Investment w/o fees @ $0.47 $6251

TOTAL BULL SPREAD COST $12,355

Bear Spread

Buy 31 contracts SPY November 120P at $7.14

Sell 31 contracts SPY November 110P at $3.13

Net Investment w/o fees @ $4.01 $12,431

TOTAL BEAR SPREAD COST $12,431

Total Net Investment *w/o fees= $24,789

Key Data Points:

X Closing Price: $21.94

X Break-even level on Expiration: $22.18

Upside potential by Expiration: $2.82 per share, total $7896

Downside potential by Expiration: $6104 investment

F Closing Price: $10.69

F Break-even level on Expiration: $10.47

Upside potential by Expiration: $0.53 per share, total $7049

Downside potential by Expiration: $6251 investment

SPY Closing Price: $115.71

SPY Break-even level on Expiration: $115.99

Upside potential by Expiration: $5.99 per share, total $18,569

Downside potential by Expiration: $12,431 investment

Rationale:

All options are November option month strikes, which provides ample opportunity for the market to break one way or another. We believe the market can not go much higher without a clear signal that the economy is NOT headed into a recession. Two companies that have been oversold based on recession fears, US Steel and Ford, are compelling investments in a mild growth environment. In addition, the recent run-up provides an opportunity to sell the general market (SPY), in the event that the market reverts back to trend.

Disclaimer: It is possible to lose on all three investments, so be prepared to risk the entire $25,000. IN OTHER WORDS, DO NOT INVEST MONEY THAT YOU CAN NOT AFFORD TO LOSE. We believe the counter-balance of the position provides a nice opportunity to hedge the recent market bounce, however option strategies are risky, and investors should be knowledgeable before undertaking complicated strategies. While we offer our opinions, we certainly suggest each investor do their own research and consult with a professional.

Source: 3 Option Spreads To Hedge Last Week's Move