Thursday, November 3, 2011

Surprise ECB Interest rate cut

Lot's of drama out there today.
Pre-market was a wild ride. S&P-futures closed @1234 yesterday. Overnight they went as low as 1213 and later on as high as 1255. When ECB decided to cut interest rates from 1.5% to 1.25%, market tumbled once again. About half an hour into the session we were back at... 1234! But that was just the beginning... of a move back up to the opening high. A dramatic V-shaped move in about 90 minutes.

Meanwhile gold is breaking out and is looking for higher prices.

5m-chart SPY; see trades-section.

Daily charts DIA, QQQ and SMH:

Halfway in the session, SPY started to base under 125.30, which is also right under the morning high (125.42). We broke the level successfully on very good volume, so I went long 125.36.
I took 1/2 profits @125.73 and raised my stop to breakeven. I sold another 1/4 @126.07 and sold a NOV 04 126-call. At that point my stop was at 125.48 (under previous intraday-low).

By selling the call, my downside is small, protected by the covered call. My upside will be limited too, but incase SPY ends high above 126 today, I will hold overnight. If SPY will close tomorrow over 126, I will have to sell my shares, but I can keep the premium from the call ($100). The covered call is sort of an overnight hedge. Only interesting if we close high enough, recent volatility in mind. I don't want to risk a big gap lower, everything under 124.36 is bad (=breakeven point/entry 125.36 minus $1 premium for the call).

The premium for the call will be dramatically lower tomorrow (if SPY stays at the same level that is). I have several options tomorrow: if we stay above 126, I can buy the call back for a big discount. Over 127, it's probably best to let the call get exercised. With SPY between 125.36 and 126, I'll keep my position and the premium (the call will expire out of the money). At/Under 125.36 I'll sell SPY, breakeven.

5m-chart SPY:

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