![\"\"](\"http:\/\/assets.jeffclarktrader.com\/ee-assets\/channels\/articles\/Screen_Shot_2017-07-11_at_11.41.42.png\")
<\/p>\n\tWell… it didn’t happen right on the opening. But a few hours into the trading session yesterday, the S&P 500 did rally up to the 2432 resistance area. That gave aggressive traders a chance to put on lower-risk short trades. The index then turned lower in the final hour – thereby keeping the pattern of lower highs on the 15-minute chart.<\/p>\n
\tHere’s an updated look at the 15-minute chart of the S&P 500 I showed you yesterday…<\/p>\n
\t<\/p>\n
\tUntil the S&P can rally decisively above the 2433 level – like a move above 2438 – the short-term momentum is bearish. This chart looks like it’s headed towards a lower low, below the 2407 level it hit last week.<\/p>\n
\tAnd that sort of action would look bearish on the daily chart. Here’s an updated look at that pattern…<\/p>\n
\t![\"\"](\"http:\/\/assets.jeffclarktrader.com\/ee-assets\/channels\/articles\/Screen_Shot_2017-07-11_at_11.40.44.png\")
<\/p>\n
\tNotice how the 9-day exponential moving average (EMA), shown by the red line, has provided resistance for this chart ever since the S&P closed below that level in early June. The 50-day moving average (MA), in blue, is support. And the S&P has been basically ping-ponging back and forth between the 50-day MA and the 9-day EMA for the past few weeks.<\/p>\n
\tEnergy is building for a bigger move, and we’re rapidly approaching a decision point. The two moving averages are coiling together. If the S&P rallies from here and breaks above the recent pattern of lower highs, then look for the index to make a all-time high above 2450.<\/p>\n
\tOn the other hand, if the S&P 500 closes below the support of its 50-day MA (currently at 2415) then stocks are headed lower. The most likely downside target is near the April low at about 2335.<\/p>\n
\tBased on the look of the 15-minute chart above, I’d say the odds favor the downside.<\/p>\n
\tSo, if you took advantage of yesterday’s rally and shorted the S&P 500 near the 2432 level, then keep your stop at 2438 – to limit any losses if we get an upside breakout – and look for a larger move lower over the next week or so.<\/p>\n
\tBest regards and good trading,<\/p>\n
\t![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
<\/p>\n
\tJeff Clark<\/p>\n
\tIt seems to me that when you sell a put your losses can be monumental. Would that not be a situation in which you would use a stop-loss? \t<\/p>\n
\t\t– Johnny<\/strong><\/strong><\/strong><\/span><\/p>\n<\/blockquote>\n
\tHi Johnny. I’ll answer your question in a moment. But first, let’s talk about the “monumental” loss potential…<\/p>\n
\tTraders should only sell uncovered put options on stocks they want to own and at strike prices they’re willing to pay.<\/strong> For example, if you like the idea of owning Macy’s (M) at $20 per share and would be willing to buy it at that price if it declined to that level, then getting paid up front to sell the Macy’s $20 put option is a terrific strategy.<\/p>\n
\tBut if you despise Macy’s, and can’t stomach the idea of owning the stock at any price, then you should avoid selling uncovered puts on the stock – no matter who recommends doing so (even me).<\/p>\n
\tIf you take the trade, though, selling puts is a less-risky strategy than buying the underlying stock – as long as you don’t do something stupid like sell 20 put options when you would otherwise only buy 100 shares of stock.<\/p>\n
\tSince you get paid up front when selling an uncovered put option, the premium you receive helps serve as a hedge against a short-term decline in the stock. Using Macy’s as an example (please note I am NOT recommending this trade, just using it as an example)… The stock is trading for about $22 per share. Traders can receive $1.40 per share to sell the November $20 uncovered puts.<\/p>\n
\tBy selling this option, you are agreeing to buy Macy’s at $20 per share – roughly 9% below the current price – and you’re getting paid $1.40 for that agreement. You’ll be profitable on this trade as long as M is above $18.60 per share on option expiration day in November.<\/p>\n
\tThat’s a lot less risky than buying the stock at $22 – as long as you didn’t overleverage the trade by taking on a much larger position than normal.<\/p>\n
\tNow, as far as using stop-loss orders on uncovered options… Yes, you should use them. <\/strong><\/p>\n
\tWhen buying an option, your loss is limited to the premium you pay. So, even if you’re monumentally wrong on a stock’s move, your loss should only be a small fraction of the stock’s price. So, you have a built in “stop-loss” on the trade.<\/p>\n
\tBut, when selling uncovered puts (or calls), you should use the same sort of stop-loss strategy you would normally employ on the stock. For example, if you normally accept a 20% loss on a stock, then work out the math and use that level for the uncovered option.<\/p>\n
\tUsing Macy’s as an example, if you bought the stock at $22 per share, then a 20% stop loss would have you exiting the trade if M closed below $17.60. Using that same level for your Macy’s uncovered put option trade… if M closed below $17.60, then you’d buy the put option back and close the trade.<\/p>\n
\tThis should keep any losses from getting out of hand.<\/p>\n
\t– Jeff<\/i><\/p>\n