Pocket yourself 1460%, Then Take a Long/Short Ride on the Indexes (QQQ/DIA, LLY/DIA)

Hope everyone had a meaningful fast, and we’re one step closer to Mashiach Tzidkenu.

That said, it’s back to business.

We’re closing down our long/short LLY-DIA trade from August first.

Yup, in just one week this puppy delivered the goods.

The dispatch was called Where Were You, Lilly? and it urged you to sell the LLY October 21^st 370 CALL for $5.35 and buy the DIA October 21^st 340 CALL for $5.45.  Total debit was a dime.  We also recommended you set a STOP buy on LLY at 370 to avoid any runaway loss.

And today…?

The LLY CALL can be repurchased for $2.79 and the DIA CALL dumped for $4.35.

Get it done and you mosey on out with $1.46 NET on just a dime spent.

And that’s a cool, daiquiri-like 1460% in JUST ONE STEAMING SUMMER WEEK!

Book it, Jerry!

[And remember to cancel that STOP buy order.]

This week’s trade bears a strong resemblance to the above LLY/DIA initiative, in one respect.

We’re exploiting the relative gains between two of the major indices, and expecting a closing of the gap that opened during the recent, broad-market bounce.

Sorry, gang.

What we meanT to say is –

The NASDAQ and DOW move in tandem, with the NASDAQ generally overshooting in both directions.

Because the two are now in the midst of a bounce (or, more properly, likely at the end of one), we believe the final blow higher will see the NASDAQ outperforming the DOW by a good measure.

And we’ve designed our trade this week to reflect that.

Take a look now at the two indices charted against one another going back to early April –

1. It’s quite clear that the NASDAQ (represented here by the Invesco QQQ Trust Series ETF) is wheeling higher with almost no trace of resistance.  It has easily overtaken its June retracement highs (in purple) and…
2. Neither RSI nor MACD are showing signs of excess (in green).
3. The Dow, however, represented by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), appears stuck, unable to rise above its former highs set in June.
4. We believe this bodes well for the gap between the two (in blue) to close in the very near future – and perhaps a meaningful overshoot higher on the part of the Qubes.

And it’s for all the foregoing that we now offer you this –

A Jew and His Money recommends you consider selling the DIA December 16^th 335/340 CALL spread* for a credit of $2.20 (10.70/8.50) and buying the QQQ December 16^th 335/340 CALL spread** for $2.36 (15.36/13.00).  Total debit on the trade is $0.16.

[*Sell the 335 CALL and buy the 340 CALL.  **Buy the 335 CALL and sell the 340 CALL.]

Rationale: first up, pay close attention to what’s long and what’s short here.  The strikes are identical for the two underlyings.

Second, be aware that you could simply go long/short the two stocks and take in an initial credit on the trade of $6.22 (327.97 – 321.75).  Just be sure you have proper STOPs in place to avoid any outsized losses.

Max gain is $4.84 or 3025% (difference between the QQQ strikes less the initial debit).

Max loss is $5.16 (difference between the DIA strikes plus the initial debit).

The trade is predicated on what you might call ‘acceleration’.  That is, we expect both indices to rise, but the NASDAQ at a much faster pace than the Dow.

We’re using long-dated options to accomplish a very short term goal.  We believe the trade could wrap within days – or up to a week.

The long-dated options offered the best premium structure for our goals.  And with spreads being relatively tight (and tightening even further as prices rise, we expect), we believe we’ll exit with a handsome sum when the time arrives to close.

G-d is good.

He awaits our complete return to Him.

May we not disappoint…

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew