2 live examples of Legging into Diagonal Spreads

5 days after stock market’s big surge due to French election result, the S & P 500 ETF SPY started to show a small sign of fatigue by moving down today from a prior 2 day sideways movement. A couple of my bullish positions (EEM 2017 LEAPS & PVH Sept 15 $95 Call) that were entered on the market surge day (4-24-2017) cooled down for about 2 days in a roll. So I sold calls against the long calls and legged the option positions into diagonal spreads as the MACD histograms and the prices of these stocks started to drop about 2 days.

My diagonal spread rolling rule will let me close the short calls when the stocks rise for two consecutive days, or roll to new short calls if the short call premiums result a good amount of profits. I also have stop losses in place to cut loss short in case the stocks go against me.

Among them, EEM has good liquidity of option trades. I sold June 02 $41 call with a Delta around 0.25 for $0.24 credit when EEM traded slightly below yesterday’s close price and it got filled quickly. The option entry was posted before and the price was $3.39. Thus, the debit of the diagonal spread is $3.39 - $0.24 = $3.15.  I’ll continue to track the performance of this trade position as we go.

PVH has less liquidity and has monthly options only (It’s not a good stock for option trades in my opinion as the bid/ask prices were wide).  I sold May 19 $105 call with a Delta around 0.25 for $1.00 credit when PVH was sold off and it got filled eventually as it bounced up intraday. The option Sept15$95c entry price was $12.22 on 4-24-2017. Thus, the debit of the diagonal spread is $12.22 - $1.00 = $11.22. PVH, an apparent shop holding company, seemed to follow the retail ETF XRT closely. This sub-sector did not perform well when compared with the general consumer section IYC.

Bought top performing emerging market ETF

As stock market shot up 2 days ago after the French Election, the 2 best performing emerging market ETF (EEM & EPI) that I have been watching were also outperforming as well. These two ETF's has been showing strong relative strength to SPY recently. EPI, the ETF for India, was particularly strong in the last couple of months. But the ETF's option interests was relatively low and the bid and ask differences are over 20%. So, I just purchased the ETF stock as it broke out near term resistance on April 4, after the French election.

I plan to hold these intermediate term positions for a few months. The stop exit will be somewhere they break 20+ day support that I identify along the way and the profit target exit will be the uptrend shows signs of ending or when the general market start to show weakness.

For EEM which has abundance of option liquidity, I bought the 2018 Jan 19 $38 Call (LEAPS) and plan to use my favorite diagonal spread strategy to manage this position. The stop & profit exit rules are similar to that of the EPI, with one extra rule of the profit exit: I plan to exit the position when the Delta of the LEAPS exceeds 0.80.

On the other hand, NFLX broke out with strong volume from a 3 month base today. I bought the September 15 $145 call as an intermediate term position as well. I'll follow up on these trades when I get time.

Big market impacts by the French election result today

Today, markets reacted to the results of the French election in which the pro-EU candidate won for the initial round. SPY & QQQ had the biggest surge (up 1.1% & 1.2% respectively) since they started to fall about 7 weeks ago. The VIX volatility index had a biggest drop (25.9%) in years.

Besides the stock market rally, the bond market (TLT) dropped as investors exited US bonds to take more stock market risks. The Gold market (GLD) also took a beating as investors reduced the level of concerns for world affair uncertainties.

The strong market impacts of the French election is shown in the market chart below. With the big rally of the stock market, the market outlook is definitely turning more bullish now. I had entered bullish positions on a few stocks (EPI, EEM, PVH) and plan to document them later when I get time.