• This Week's Trade Idea:
Bullish: National Grid ADR (NGG ) – Buy the March 17th Expiration 60 Calls for $1.00 or less with a close or anticipated close above $59.55.
Bearish: Microsoft (MSFT) – Buy the March 17th Expiration 65 Puts for $2.60 or less with a close or anticipated close below $62.75 in a down market.

• Market Overview:
What wasn't a great week was made to look much better thanks to “Jobs Friday”. The major indices all finished the week on a high note thanks to the “jobs number”.

• Below the Radar:
Lost in the celebratory hoopla of Friday's “jobs data” and the ensuing market's blast off is the fact that even at 227,000 jobs created, that's still 73,000 jobs shy of the critical 300,000 jobs per month that are needed to keep up with population growth.

• Options Academy:
In this week's installment of Options Academy we're going to stay with the Calendar spread to see what else we can wring from it in an unconventional way.

Something's got to give!

The Trade(s):

Bullish: National Grid ADR (NGG ) – Buy the March 17th Expiration 60 Calls for $1.00 or less with a close or anticipated close above $59.55.

Bearish: Microsoft (MSFT) – Buy the March 17th Expiration 65 Puts for $2.60 or less with a close or anticipated close below $62.75 in a down market.

We strongly recommend that students attend or view tomorrow’s webinar before deciding on their own to act on these ideas.  The webinar is at 11:00am Eastern Time. If you haven’t done so already, go to: https://attendee.gotowebinar.com/register/6449584955832188673 to register for the webinar. Both of these trade ideas require a more detailed explanation that we will provide in tomorrow’s webinar.  We watched both of these intently (and many others) only to see the late day shenanigans commence as per usual.  Both are very close to a trigger in our view but we must be patient and let things fall into place.  That's just the way it is right now in this protracted consolidation environment.

Outlook:  These are really both technically oriented trades.  We remain trapped in a market that will not break out nor break down convincingly.  This makes trading more difficult because things are essentially trend-less.  It's for this reason we have both a bull and bear idea yet again and it's also the reason we're trying to approach things with dollar-cheap and implied volatility-cheap options.  We're definitely susceptible to whipsawing right now so we're not ready to grab high delta options at high dollar amounts at this juncture.  Additionally, we'll look to dutifully roll if these trades initiate due to the aforementioned potential for a whipsaw effect.

Technicals:  NGG's stock price has been beaten down severely over the past 5 months.  It may have finally found a base it can lift off a little from in the mid $50s.  It seems as if it can trade up a little higher that may put it on the “comeback trail” with a lot of room to move back up.  We typically prefer ITM options in the 60 – 70 delta range but since this would trigger just .45c shy of the 60 strike, we're going with the ATM call at that point because it would be dollar cheap and the liquidity seems better than the 55 strike.

MSFT has performed very well lately so this is a little bit of a counter-trend trade.  We're simply trying to catch a little bit of a retracement in there as the stock has a history of trading lower post-earnings and it looks a little vulnerable at the moment.  This is certainly not a “home run” trade and we won't permit this to trade against us for too long should the trade trigger as it is a counter-trend trade.

The reality, as we see it, is that we need to be prepared for a trade in either direction since the market at present has no trend.

Fundamentals: Utilities have been relatively well of late so we're anticipating more upside in NGG if it can push just a little further.  In MSFT, there's really nothing wrong fundamentally it's just that it seems like it's about to take a breather.  As noted above, these 2 ideas are much more technically driven.

(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

Recap of Last Week:

Both ALLY and TIF proved difficult to initiate.  ALLY moved up very strongly never giving us a good opportunity to enter.  It simply never backed off and finished up over 10% for the week.  TIF never gave us a chance either.  It never broke below nearby key support and the stock operators in there used Friday's job's data to jam it higher in somewhat ridiculous fashion, as if a few more jobs created will have scores of new workers beating a path to Tiffany's doors!  Their CEO resigned over the weekend and all of Friday's gains were erased rather quickly to start the week.  Could be worth keeping any eye on if it breaks nearby support finally and the markets are weak.

(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

More of the same.

What wasn't a great week was made to look much better thanks to “Jobs Friday”.

The major indices all finished the week on a high note thanks to the “jobs number” as it's referred to by television commentators.  We cover this dual jump more in-depth in Below the Radar so for now we'll simply state that what we saw on Friday was not only a relief rally but a necessary one!.  As we've been noting in our weekly webinars, the Wall St. stock operators needed to lift the indices off the 20 day simple moving averages (SMA) which were touched last Thursday, YET AGAIN.  A meaningful breach of the 20 day SMA would likely beget more serious selling which begets more selling.  Since we haven't witnessed any protracted and serious selling in several months, we're overdue for it in some ways.  BUT, by the same token, we've witnessed a multi-month consolidation after a long run to the upside.  The indices have been able to hold onto almost all of their gains with very little retracement.  This is typically viewed by most chart-watchers as a positive and it very well could be.  However, it's becoming more and more clear that we need to see a break above the resistance (R) at recent highs or a breakdown below nearby key-support (S) before we'll get broader and more interesting trading opportunities.   Note below that our RSI indicator continues to show negative divergence.  Momentum cycles still register as bullish at this snapshot in time but the longer this tedium persists the more they will weaken.

With earnings releases starting to peter out and a dearth of key economic data this week, the markets will have get even more creative when it comes to focusing on a catalyst for movement.  One thing to keep in mind is that guidance for most companies remained conservative.  As we write, the VIX is percolating up a little from a very low level but just as with everything else only time and technical breaches will tell what's in store...

It looked as if the markets might finally liftoff a little last week but they faltered quickly and returned to a state of tedium.  How tedious?  Check out this snippet from Marketwatch.com:

http://www.marketwatch.com/story/is-this-the-most-boring-stock-market-ever-2017-02-07

So how dull is it?

Welcome to the most boring market on record, says Charlie Bilello, research director at investment adviser Pension Partners.

Bilello has shared the chart below showing the S&P has never gone this long without an intraday move of 1% or more.

Charlie Bilello/Pension Partners

And he is not alone in seeing tough times for short-term traders. CrackedMarket’s Jani Ziedins warned last month that “the biggest risk in flat markets is most traders arrive with a bullish or bearish bias.”

“Often the best trade is to not trade, and that has definitely been the case recently,” Ziedins wrote in January.

Lost in the celebratory hoopla of Friday's “jobs data” and the ensuing market's blast off is the fact that even at 227,000 jobs created, that's still 73,000 jobs shy of the critical 300,000 jobs per month that are needed to keep up with population growth.  Also lost, or perhaps “ignored” or “buried” would be more appropriate, in television coverage of the number is the fact that seasonal adjustments accounted for approximately 170,000 of the jobs “created” (imagined?).  These weren't confirmed hires, they're simply estimates made by notoriously revision-susceptible government employees.  Also, see below as to how average weekly work hours continue to decline.

If that wasn't bad enough, check out the employment “growth” in S&P 500 companies.  It's just not there.

So, why dedicate so much space and thought to the jobs situation?  Well, that's what moved the markets.  That's what “saved” last week.  That's what acted as the cover story/catalyst for Friday's technically critical liftoff from the key support just below.  So while the headline number was treated positively and the celebrations followed, the reality is that things aren't as swell as they seem.  We're driven by technicals as are the markets at times so we're not going to overthink things and in the end we're going to consult the charts to tell us how to navigate.  However, we're going to file this away and keep it in the backs of our mind until the markets convincingly break out to new highs.  The bottom line is this:  If this report is considered “good”, we're quite concerned about what a bad report may look like.

On a related note is this that we found at oftwominds.com:

Notice how not only is employee compensation still trending downward dramatically but in dollar terms we can see that on a household basis the average American home is lighter by $13,500 per year!  TV economists remain mystified by the fact that the recovery never really “took off”.  We remain mystified by TV economists!  One question that has to follow is, well, if hiring isn't what it's supposed to be and income for employees continues to decline in historical terms, then what's keeping the economy and the markets aloft?  We're glad you asked!

As can clearly be seen, Central Banks, along with nearly all other entities, have expanded credit at an astonishing rate and that's what has supported and continues to support the world's key economies.  Additionally, it's the belief that they'll continue to do so without exception that allows money managers to continue bet the upside without any real worries.   Armed with this information we can contemplate both the upside and downside.  First off, we can imagine what the upside can be if we actually see legitimate improvements in employee compensation for the first time in decades.  That coupled with central bank credit magic could truly produce something spectacular.  Conversely, since credit is the magic glue holding everything together, imagine what could happen if faith was lost in wizards at the central banks.  That's an area that we always keep an eye on and what makes it easy to roll, roll, roll our calls when riding stocks ever-higher!

In this week's installment of Options Academy we're going to stay with the Calendar spread to see what else we can wring from it in an unconventional way.  Last week we covered how we can use the spread defensively to “hit the pause button” when need be.  Additionally, we covered this concept somewhat in-depth at the tail end of last week's Advantage Point Morning Call webinar, of which, the recording is available for those that are interested.  Let's get to this week's material...

We noted that one of the main characteristics of the Calendar spread is that it is worth the most when stock price is at the strike in focus.  This means that the maximum value of the Calendar spread is seen when it is At-the-Money (ATM).  If we “go long”, that is, purchase the Calendar, we buy the longer-dated expiration and sell the nearer term.  That allows us to take advantage of the faster rate of decay of the near term option we've sold vs. the relatively slower rate of decay of the longer-dated option we purchased.  SO, think about it, if we initiate a long  ATM Calendar spread as described, where we “own time”, we really want the stock price to remain still.  If the stock price moves away from the ATM strike where we've initiated the spread, in either direction, the spread's value declines which hurts our position since we own it!  Now let's think about this in reverse.  What would we want to happen if we SOLD instead of bought the Calendar spread?  We'd want movement away from the ATM strike in focus since that would result in a decline in the spread's value and since we've sold it, we want it's value to drop.  This selling of the calendar is really the opposite of how the Calendar spread is typically taught.

Most educators try to steer students away from playing with fire on the decay curve.  The decay curve describes how shorter-dated options will lose their time value at faster rates than longer dated options.  So, naturally, instructors try to help newer options investors avoid becoming victimized by owning the shorter-dated options which is why the Calendar is covered from an overwhelming long-only perspective.  This is the “way to go” when just getting started in options but when you take full command of options theory and application you realize that you can use those “tools” in other creative ways and that's exactly what we're covering here.  Let's get into a little hypothetical nitty-gritty...

Many folks are intrigued with the concept of “playing earnings”.  This desire to speculate on post-earnings release stock price movement is only natural as most investors witness dramatic moves quarter after quarter, aided by media-build-up, and wish to benefit from it.  The thing is, earnings movement can be very unpredictable along with being volatile so naturally this leads to higher options prices quite often.  In fact, it can lead to extremely high options prices which means that the risks have really been ratcheted up if one were to buy a Straddle for example.  The Straddle, buying the put and call at the same strike at the same expiration might seem like a great idea since the owner could potentially profit if the stock moves significantly in either direction.  Typically though, the problem is that there's a lot of competition to own the Straddle and thus the price of it can be driven up a great deal making it very risky if the earnings release produces a “dud”, that is, a lack of volatility.  Not only is it risky but it can also become cost prohibitive to the extent that it becomes unaffordable for many would-be speculators. It's for this reason that the “Poor Man's Straddle” can be attractive.  The poor man's Straddle acts a great deal like a Straddle in its performance but it's much less costly.  As it's less costly, it doesn't produce the practically unlimited profits that a long Straddle can but that's why it's referred to as the “poor man's” in the first place; less costly, less potential.  But, it still let's one participate in earnings type trading without breaking the bank.  The thing is, you already know what it is... It's the reverse of the Long Calendar, it's the Short Calendar.  If we sell an ATM Calendar and the post earnings stock price movement is dramatic, this will cause the Calendar that we're short to lose value thus earning us profits in a somewhat similar fashion to the long Straddle.  NOW there are many nuances that are associated with this type of trade and many considerations, but it's something worth exploring and considering.

We encourage you to model this type of scenario on the Options House platform in TradeLab > Spectral Analysis.  Compare how this could work vs. a long straddle and note the similarities and differences.  This is another unconventional arrow worth keeping in your quiver.

Additionally, tune in for our Advantage Point Morning Call Webinar tomorrow, Wednesday, February 8^th at 11:00am Eastern Time.  Time-permitting, we’ll briefly cover the construction of the Poor Man's Straddle. If you haven’t registered for the webinar yet, go to https://attendee.gotowebinar.com/register/6449584955832188673.

Have a great week!

The Advantage Point Team