Cash Flow in December

CASH FLOW IN DECEMBER

What a great time of year to make a few short, quick turn trades in the market. No money does not grow on Christmas Trees, but almost every year there is a Santa Clause rally. I won't go into all of the reasons here. I've studied it for years and except 1997, there has been a rally or at least an upturn into the end of the year. Many people (including the big institutions) want to get there money in before January, which is historically the best month of the year.

I'm still looking at the Dow, playing the ETF, the DIA. Again, it trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA is at $119 plus pennies. It is a actual stock. This fund (not a mutual fund) owns all of the stocks in the DJIA, or Dow Jones Industrial Average---made up of 30 stocks in blue chip companies.

The stock trades in one dollar increments on the strike prices. So you can do straight option trades, spreads, covered calls, etc. Let's look at a few straight option trades. Options are risky with a great reward if you're right, and losses if you're wrong. Work out your trade-suitability with your own broker.

One more point before I speak of the Actual Trade. Options historically all expired on the third Friday of the month. Some no have expiration dates every other week. Some larger stocks even now have weekly options. I think these all need to be practiced traded with paper-money, before you put real money in harms way. Do they have the same open-interest? How do they perform? I think they are probably like typical options, but we need to learn more.

Look at the DIA $118, $118 and $120 strike price calls for January, the ones which expire on the 21st.
Jan DIA $118 calls: $3.35 x $3.45
Jan DIA $120 calls: $2.18 x $2.20

Now look at the same strike prices which expire on December 30th.
Dec 30th DIA $118 calls: $2.09 x $2.16
Dec 30th DIA $120 calls: $1.04 x $1.07

You can quickly see how much that extra two weeks cost. Also, while January may be a good month, usually, it will be there when these shorter options play out. Each strike price has its advantages and disadvantages. I've spent many blogs explaining this time value, and buying in-the-money options versus out-of-the-money options.

THE TRADE

Once again, several factors are important. One is where the Dow stands in its own range. I think the short term range is 11,800 (11,600 would be really good support) and about 12,200 (12,400 or 12,600 would be a high short term resistance).

Tomorrow AM, and any AM for that matter, you watch CNBC, or any news channel and watch if they have the Dow Futures. If the futures show up or down about 100 points, then it could be a good play. Read my previous blogs where I explained the 100 point move, up or down, might equal a .50 cent profit in the option. If the futures don't show this, then wait. There will be another day.

For example, if the Dec. 30 $119 calls are $1.20, 10 contracts would cost $1,200. Now if one day the Dow moves 100 points, and assuming you got in at a good time, you could make .40 to .50 cents on that move. Your $1,200 could be $1,600 to $1,700 in a day, or even an hour. Yes, there could be news to spoil the move, but right now the option are out two weeks, it has time to work. If you are worried, and want more time, maybe buy the Jan. $120 calls.

One point is to get your sell order in, right when you make the purchase. And a stop loss at about 50% of the option price. $1.20 purchase, would put the protective stop loss on the option at .50 to .60 cents. Cut your losers and let the winners work.

One last point: You could make a lot more money by getting in the day before, but that presents a whole new aspect of figuring out which way the wind will blow. More profits, but more risk.

Wade