Vegas Baby…

We had the pleasure of attending and speaking at the Las Vegas MoneyShow last week. We conducted a two-hour workshop on our methodology about how we generate our ideas and ultimately pick the exchange-traded funds (ETFs) and options that we recommend.

First and foremost, we want to welcome all of our new subscribers from the event and we appreciate the confidence you and our existing subscribers have in us. During the MoneyShow, we talked about our positions and how they are extensions of our market view. We now want to take an opportunity to review our options positions and reflect upon our market view.

Our market view for the short term is one of range-bound trading with a seasonal bias lower. We see significant headwinds that will prevent us from sustaining all-time high levels on the major indices. But conversely, we do not believe conditions are deteriorating enough for the market to experience an extended breakdown. However, given the seasonally weak market period we are in, we think spikes lower are possible. Thus, we are left with a market absent of any high directional conviction with a potential for downside volatility. Moreover, recent “Fed speak” from historically dovish members has sought to coax the market into the expectation of at least one or two rate hikes this year. Our current positions reflect the trading range and the possibility of a market adjustment with respect to rates.

With respect to market positions, we currently own the iShares Russell 2000 (IWM) June $110 puts. At the time of this writing, we currently are in the money. However, the options are sitting at a slight loss reflective of the time decay since we entered the position. Should we get a spike in volatility, as we expect, we would exit the position with a gain. On the flipside, we have sold SPDR S&P 500 (SPY) June $215 calls and an August call spread to generate income while the market resolves the range-bound action. We chose to use a spread to limit our risk since we already had a short call in place. We are sitting on gains of 92% on the June SPY calls and 31% in the SPY call spread.

Finally, we also are long in the PowerShares DB US Dollar Bullish ETF (UUP) June $24 calls. This position is at a healthy gain of 46%. The dollar was oversold at the time we put on the trade in early May. Recent hawkish Fed comments have contributed to our gains. We expect the dollar gains to continue as the market digests the possibility of earlier-than-anticipated rate actions.

All of these options positions are monitored daily and will be closed out prior to expiration. With the high unrealized gains we are carrying, look for us to close out some of these positions in the days ahead. The risk-to-reward ratio is beginning to signal to us that taking profits in a market with no gains is the prudent thing to do.  As always, we look to trade when we can and not when we must.