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SP 500 In Buy The Rumor, Sell The Fact Mode

12.11.12

SP 500 in buy the rumor, sell the fact mode

The SP 500 is 90 points off it's 1340 low it made on Nov 16. What has really changed since then though? Well there is the "Santa Clause Rally" rally that we hear about every December but mostly the SP 500 is trading directly off news on the Fiscal Cliff. While optimism remains that a deal will get done, whether it does or not, I believe the market will correct & the result will be an aggressive selloff over the next few months.

Technically the market is also running into resistance at it's current level of 1430 level. There were 3 tops made over the last 2 months near these levels on Oct 23 (1433.25), Nov 2 (1431.50) & Nov 7 (1431.75). All 3 times the market traded at these levels it failed & resulted in a selloff. I am looking for the same thing to happen again.

The way I am playing this forecast is with options. I am going to sell a Jan strangle & use that money to buy a March put. Specifically, I am selling both a Jan ES 1350 put @ 7.50, Jan 1475 call @ 7.00 & buying a March 1350 put @ 21.00. If filled at these current prices total cost is 6.50 points ($325). However, please keep in mind the ES call is completely naked & has unlimited risk to the upside. Personally, I am comfortable being short futures from 1475 as at that level I believe the SP will be severely over bought. Lastly, this spread trade involves 3 different options which results in 3 separate commissions. Please consider these risk before you place the trade. Feel free to contact me with any questions or comments.

Yours Truly,

Robert Schroeder

855.870.1501 / rschroeder@rcmam.com

Bob Schroeder started trading options on CBOT floor in the corn options in 1993. Since 1997 he has been working with clients on different strategies while running a high volume execution desk for CTAs, Hedge Funds & high net worth individuals. By working with these different traders he has learned multiple complex strategies on how to maximize profits while still making it affordable for the retail client. He does not believe in simply buying options or exclusively collecting premium by outright shorting options. Instead he builds different strategies that usually include buying & selling a combination of different options. He also is able to adjust strategies based on a specific client's risk tolerance. For more information please contact Bob Schroeder to receive a 2 week trial of his options newsletter