Market sentiment seems to have shifted from “buy every dip’ to “sell every rip” and this is being reflected across the board on all market indices. We’ll review an options spread to capitalize on this negative change in trend. The Dow Jones Industrial is headed for its first losing month in the last six. Here’s a 6-month chart of the SPDR Dow Jones Industrial Average ETF Trusty (DIA) , a popular ETF which tracks the price movement of Dow, with three exponential moving averages displayed. Traders detect a trend change in the market using EMA crossovers. In the chart below, I have used 3 lines: 10-day EMA (blue line), 21-day EMA (yellow line), and the 34-day EMA (pink line). Note that the last time, the 10-day moving average crossed above the 21-day moving average was back in late October/early November when the markets were just beginning a new bull run. A similar setup showed up on April 8th, when the 10-day average crossed below the 21-day measure. These crossovers are widely watched by swing traders and long term investors alike as they represent a trend change. Based on this thesis I want to make a bearish bet on DIA using a trade structure called a bear put spread. The Trade: DIA is a highly liquid ETF and if you look at its option chain, you will notice that it offers $1 wide strikes. This is great, because you can construct a $1 wide put spread and risk as little as $50 to make $50 per winning trade. To increase risk, simply add more contracts. eg. Doing a 100 contract trade would risk $5000 to make $5000. All I need is for DIA to drop by $1 by expiration date for this trade to double my money. Here is the exact trade setup: Buying $383 put May 17th expiry Selling $382 put May 17th expiry Limit Price: .50c If DIA is trading at $382 or below on expiration date, this trade will generate a 100% ROI on the amount risked. DIA YTD mountain SPDR Dow Jones Industrial Average ETF Trust YTD Amazon and Apple report earnings this week. In addition, we have Federal Reserve rate decision on Wednesday. These are all significant market moving events and so a solid risk management plan needs to be in place for any trades taken this week. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
