Will the Market Rally EVER End? Strategies for Getting Out of Trouble

Wow, it’s been quite a remarkable March/April hasn’t it? I don’t know about you, but when the market drove up, up, up at the end of the March trading month I was caught quite unprepared. I have been expecting a sell off for a while, in fact as a precaution,  I didn’t even get puts in March, but so far I’ve been really wrong. So as expiration day closed near, I had to make a move. There were two strategies that I contemplated, the butterfly up and the vertical roll. I opted for the vertical roll.  Now here I sit, in the money on SPX and NDX once again waiting for the market to dip.   We’ve seen small dips the last couple of days and I believe the indicators are there for a sell off and when that happens I will be ready.    I’ve been watching two indicators, the Relative Strength Indicator (RSI) and the CBOE Volatility Index (VIX) and both are showing signs the market is poised to turn around.   So what are the strategies I’m looking at right now?  If the market does dip in the next week or so, I will either butterfly up this month or vertical roll to next month.  It all depends on how far the pull back is and when it takes place.   If the pullback is significant enough I may just let my options expire.  One thing to keep in mind, you can make money on a vertical roll, but you will always have to pay if you butterfly.

I did hear of an interesting strategy from my mentor Scott Chaney, but it is only for experienced and bold traders.  I have in-the- money calls on the NDX.  If I expect the market to sell off on a given day or couple of days and if I have sufficient buying power, I can go and sell an additional vertical call spread one strike price higher than what I currently have, in essence doubling the number of NDX call contracts I have.    For instance, if I have 5 NDX Apr10 1925/1950 calls, I would sell and additional 5 contracts of NDX APR10 1950/1975 calls.  I will make a lot of money selling these calls as they are in-the-money.  This strategy is depended on the market going down, like it did today, on the dip I would go and buy the 1925/1950 calls for less than or equal to what I sold the 1950/1970 calls for, in essence, moving my strike price up from 1925/1950 to 1950/1975.  That still doesn’t get me out of danger if the market moves up above 1950, but it gets me further away from trouble, and doesn’t cost me money, in fact could make me money.  You gotta have guts for this one!