UUP-SPY Correlation and PCLN Bear Call Spread

This week’s video shows the Dollar UUP and S&P500 SPY inverse correlation may be coming back together. Since the Dollar UUP broke support this week we may retest the 200 day moving average which may enable equities to make the next move higher.

In last week’s video, I was looking at Disney DIS and Oracle ORCL on the long side with ORCL being a high risk earnings play. Well Oracle reported earnings this week and popped at the open and then crashed. The calls I recommended made about 60% and I was out near the open. The video shows what happened the rest of the day and how Oracle dropped hard. By selling into strength, I was able to book profits. Now that ORCL may have stabilized and the marketis finding some support, I sold a bull put spread which is also covered in the video.

For next week, one trade I’m looking at putting on is a bear call spread in PCLN. Today’s video covers the setups and potential strikes in detail on this high probability trade setup.

Weekly Market Wrap Video Transcription:

Welcome to the Stock Option Assassin weekly wrap. We’re going to go over the S&P500 quickly via the SPY. We’re also going to look at the dollar and a trade idea for next week. And we will also review a couple of our trade ideas from last week.

First of all, just so you know, it’s about 20 minutes before the bell on Friday, March 23rd. We still have a little bit of time but the S&P –

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S&P500 Technical Analysis

We’re getting a little rally into the close. But I just want to point out the volume today is like – I don’t even think we’re going to break a hundred shares. This is just super anemic volume, which is actually maybe good for the bear’s taste that we pulled back on light volume. Maybe we’re going to push up to this next level next week. I think that might actually be the case.

Let me show you this level. This is 144.27. I think that might be a little high for us. But where I’m getting that level is – If I switch to the monthly chart, you can see that (this pivot was our 2011 highs) this is where we hit and pulled back off of – this candle. And this was June 2008 and then April 2008. Really right before the big crash is where we might be headed next week or in the following week. I still think we’ll do for a pullback, but you can’t argue the tape.

On the daily chart today, we came down and kissed this 20 day moving average and rallied off of that, so that’s an indication of a little pullback. I still think we have a little gap fill in here. I think ultimately we head to the 50, but we may push a little bit higher before doing that.

Let’s look at the weekly chart since we’re at the end of the week. Look in the weekly chart of the SPY and you can see that we basically had a pause week. Now this thing might close a little bit higher, a little bit from where we are now. We had this spinning top doji, which at the top of an uptrend this is a pause in the market. It doesn’t really mean much until you get some confirmation either way, but you’re just telling that there’s a little pause on the market on the weekly chart.

So, we can very well retest this 137.20 level and then move higher, or maybe even move higher and pull back later. But what I’m looking for as a lead indicator on this is the dollar.

A Look at the Dollar:

Recently, the UUP is what I’m using as a proxy for this. Let’s switch back to the daily chart. The UUP had been in this downtrend where we created a new low – we had a higher low, a lower low. And then, in these past couple of weeks we actually made a new high, a higher high. And now that we’ve pulled back, you got this little bearish bear flag. And then today, we broke down.

And so, since we’re right at this support area, I don’t know if this is going to hold necessarily, but there is a decent chance that this thing goes back and retests the 200 and possibly even this pivot low. So if this happens next week – the dollar continuing to lose – the market will rally up most likely because it seemed like the correlations were off earlier in the week. But it seems like the correlations are back. We’ll find out more next week.

But if we look at the 15-minute chart of the UUP today, you can see at the open we started lower; we sold off and ended up flat on the day, or flat for the rest of the day.

If I look at the SPY, you can see pretty much the exact opposite happened. We rallied up and then ended up flat on the day. So I think this correlation is still making sense. And if the dollar has broken support whereas the SPY has not, chances are the dollar will move lower and the SPY might retest the highs. So even if we get a retest of these highs and possibly a push up into the 144 area, that would not surprise me at all.

Last Week’s Review:

So, how I’m playing that – Last week we talked about two plays: Disney and Oracle. Let’s just look at those.

Disney Technical Analysis (DIS)

And we talked about Disney which had this big push, consolidating. And you’re really still in the range of this candle. You’re getting a little bit of an update on Disney today – up almost 1%. I did not take this Disney trade last week, but what I did take was the Oracle earnings trade.

Oracle Technical Analysis (ORCL)

And we talked about Oracle consolidating here. I took a small position, and Oracle popped on earnings. I got out not at the top, but I got out pretty much around 10, 10:30 that day. I made a decent profit, and I’m glad I got out because look at this thing – just tanked and is now closing lower.

What I did to look to put on today in a small position was it seems like Oracle finding a little support here around 28.50. I did put on a put credit spread here, thinking that Oracle may get a relief bounce or even if the market hits higher, this thing reverts back to the mean.

And if I put on my ATR Bands here, we’re at the lower part of the bands. If we revert back to the mean, which I’m using the 13 day EMA, then that put credit spread would be good. And that was April options. So, we’ll see how that goes. I’m trying to play Oracle on both sides here. It took a little profit on the calls. I think the selling is a little overdue or little overdone for them.

Priceline (PCLN):

But what I’m looking for in the next week or so, and I want to see if we push a little higher – is Priceline. Priceline has been in this relentless uptrend. And people talk about how Apple has changed. Priceline has gone from this year – Let’s see. Basically, it started the year on $475, and we’re now trading at $714. That is like a $200, almost a $300 move, a $250 move in just the past couple of months. And it really hasn’t stopped. It reminds me of the Apple chart.

Today, in Priceline, we’re getting this top here. We really haven’t had any big pullback days. I’m starting to question how high Priceline can go for some bearish exposure. I’m not really looking to buy puts, but what I will look at is potentially selling some call spreads. And right now, possibly the seven –

Let’s look at the options real quick: Priceline April options. For those that are new to spreads, in ThinkOrSwim, you can go to open interest. I have on volume of interest, but any of these ones you can change. If you drop this down to intrinsic value, you can see that the April out of the money calls (as any out of the money options) have zero intrinsic value. So when you sell call spreads, it’s a good idea to sell things that can potentially go to zero. If Priceline stays where it’s at or even reverses and goes down, these options will go to zero. So I like the idea of selling out of the money credit spreads, which is a very popular strategy.

So, in Priceline, the strikes are $10 strikes. What we would look to do is potentially sell – Let’s just see. If I switch this to vertical, you could sell the 740 call spread – sell the 740, buy the 750, collect $2.80.

Let’s see what that looks like on the chart. If I go back to the chart, 740 is basically this level. So as long as Priceline stays below 740 by April expiration, that’s even like a $30, $23 move that we have some room we’re going with. If Priceline stays below 740 by April expiration, then we would end up collecting about $2.85.

And your risk-reward on this is the difference in the strikes minus the credits. Our reward obviously is the credit we could keep, but the risk on this would be $10 minus that – which would put us at about $7.20. So when you look at that as a risk-reward, you’re looking about a three to one risk-reward, where one being the reward and three being the risk. And I think that’s a decent tradeoff for this type of credit spread.

And again, credit spreads we’re looking to collect theta with the idea that the out of the money options would eventually go to zero or at least lose some of their value. And we would look to collect all or some of the credit.

So, that’s my trade that I want to put out there this week. I did not take the trade today. I want to see if we get a little further push up in there. We may look to sell maybe the 750, 760. So let’s see if we get any sort of indications next week.

But right now, when you look at the S&P and we’re above the mean here. But again, if we look back at the 20, we found some support to 20 and bounced. So if we get a little push in the next week, then we may look to hold off on that credit spread for now.

That’s a Wrap:

So, you guys have a great weekend. If you have any questions, let us know. We’ll talk to you next week!

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