The Dow continues to be propped up by, at this point who really knows, but it is certainly not reality. This market has ignored every red flag we have seen these past few months. You have all heard the saying that says “the bigger they are the harder they fall”, well that is exactly what we feel this market is setting up to do. Market internals are not good by any measure and frankly the signs of continued inflation are everywhere.
This trade gives us a very attractive risk to reward ratio and carries us through the new year so we have ample time for the coming correction to take shape. This trade is particularly good as a hedge for all of you who continue to buy into this market. Hear me now and believe me later, the light at the end of the tunnel is not a way out but rather a freight train heading straight for us.
Buy one January 2007 Dow 121 put and at the same time, sell one January 2007 Dow 116 put for a combined cost and risk of 65 points ($650) or less to open a position.
Max profit, assuming a 65 point fill, is 435 points ($4350) and occurs with January 2007 Dow trading at or below11,600. Break even is 12,035 so each point that the Dow falls below the B/E point is a profit of $10 until we reach max profit at 11,600.
Max risk, before commissions and fees, and assuming a 65 point fill, is $650. This occurs at expiration with January Dow trading above 12,100.
Odom & Frey
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