I bought three 13/12 June strangles as XLF is hanging around \$12.50 today. My reasons are as follows:
- S&P500 is approaching 950 on a giant gap up today. This is an important pivot on many levels. So we either turn back down or break upward from here. Either way, we're at the top of a month-long trading range from beginning of May. See Figure 1.
- XLF is testing a trendline from May 2008. This line has been well respected for a year. So a significant move is expected. See Figure 2.
- XLF is now at the neckline of an inverse-head-and-shoulder formation and in the middle of a big trading zone, from around \$9.15 to \$15.33. Again, we either break up or not with a big move. See Figure 2 again.
Risk: \$0.69Stop: if the total premium falls below \$0.50
Target: \$15.33 to the upside and \$9.15 to the downside.
Reward / Risk = 2.83 / 0.69 = 4.1 (upside) AND 3.35 / 0.69 = 4.86 (downside). Both are less than 5.0, but that's because I'm calculating using the maximum potential loss. The R/R would be above 5.0 if I use my exit stop of \$0.50 on the premium.
[caption id="attachment_1497" align="aligncenter" width="500" caption="S&P 500 ETF"][/caption]
[caption id="attachment_1498" align="aligncenter" width="500" caption="Financial Sector SPDR ETF"][/caption]
[caption id="attachment_1499" align="aligncenter" width="500" caption="Financial Sector SPDR ETF"][/caption]
: http://traderpau.files.wordpress.com/2009/06/2009-06-01-spy.png : http://traderpau.files.wordpress.com/2009/06/2009-06-01-xlf_prop.png : http://traderpau.files.wordpress.com/2009/06/2009-06-01-xlf.png