The Debit Spread

The market continues upward, breaking through what were perceived threshold limits, 10,700 on the Dow, 1130 on the S & P.  Volume is low, off a full 30% from September last year.  While the market moves northward and there is little talk anymore of a double dip, I still believe we are headed for a correction, downturn, whatever you want to call it.  I don’t believe and never did believe we were headed for a double dip, but I still go back to my old soap box reiterating that the economic news is not good and won’t be good until jobs return. So given what I believe, how do I trade?  First I’ll admit that I’m becoming quite the fan of the vertical roll.   With the NDX on a holy tear, I have vertical rolled my position twice, both times to the next month and at least one strike price away.  I am vertical rolling myself out of danger, and I’m very comfortable with that strategy.  Most of the time I make money with the roll, one time I had to pay, but I’m very much okay with giving back some of my gain to remain safely out of the money.   I’ll wait for the market to turn down and lose volatility.

The one trade that I’m experimenting with (read, it’s a gamble so don’t necessarily follow my lead!)  is the debit spread.  I believe the market will go down sometime in the near future – (clearly a directional trade, which I usually avoid, but in this market I’m willing to take my chances) – so I BUY a debit spread – I’m trading the S&P, a 10 point spread expecting the market to take a down turn and when it does, I sell the position for a profit.  Warning!!!  This only works when you are predicting the direction of the market and you are correct!!  What I specifically like about this strategy, which by the way is a 360 degree turn from the iron condors I usually trade, is the cost to get into the trade is small, your losses are finite, limited to only the amount it cost you to buy into the position and your profit is huge if you call it correctly.    Okay, I’m becoming a glorified gambler – and I like it.