Short setups

The bulls had a nice day today but I'm not feeling too optimistic...not after last week's breakdown. It seems like oil will continue to dictate market sentiment and direction. Be aware of the following economic stats this week:

Date	Time (ET)	Statistic
27-May	10:00 AM	Consumer Confidence
27-May	10:00 AM	New Home Sales
28-May	8:30 AM	Durable Orders
28-May	10:30 AM	Crude Inventories
29-May	8:30 AM	Chain Deflator-Prel.
29-May	8:30 AM	GDP-Prel.
29-May	8:30 AM	Initial Claims
29-May	10:30 AM	Crude Inventories
30-May	8:30 AM	Personal Income
30-May	8:30 AM	Personal Spending
30-May	8:30 AM	PCE Core Inflation
30-May	9:45 AM	Chicago PMI
30-May	10:00 AM	Mich Sentiment-Rev.

Pure speculation: In the very short-term I think it's reasonable for oil to pullback a little further and for SPY to climb back to 140 (or even low 140s). If any of this transpires I will be looking to buy Puts or Bear Put Spreads (aka: debit spreads) because I think more weakness is ahead and any pullback in oil will be temporary. I will also look at selling OTM Call Credit Spreads above significant levels of overhead resistance. Of course the market (SPY) could go straight to 132 without any more bounce so be cautious. Here are a few setups to note (click on company name or symbol to launch graph):

UnitedHealth Group (UNH) - bearish - may be on its way back down.

Apple (AAPL) - bullish - like AAPL to the upside. Use yesterday's low or the trendline as a tight stop.

Transocean (RIG) - bullish - use a very tight stop (see trendline) as the drillers have been getting punished.

Capital One (COF) - bearish - anxiously awaiting this lower trendline to be breached. Also, the fundamentals (i.e. tons of bad debt on the books) support a lower price.

UNP - top of its trading range

With the S&P closing above 1400, a lot of traders have become short-term bullish. This includes myself as I have also made short-term directional bets (via debit spreads) that SPY will make it to 144/145 before finding more resistance.

It is certainly possible that this bullish sentiment has gotten a little out of control, or even perhaps that this move is just a head fake. If you agree of this possibility then you might want to consider balancing your option portfolio by keeping some bearish bets open. Below is a specific way to do just that.

I have been championing the recent move of UNP, ever since it broke out of its ascending triangle pattern at the beginning of April. That said, I think it has become a little bit overextended for the following reasons:
1) UNP has a 2 day RSI of 98.99
2) UNP is now trading at the top of its trading range
Long-term I'm still bullish on UNP; I just like its chance of a pullback. I also think that a realistic price target for this pullback would be former resistance (or 137ish)


Given the aforementioned price target, you could always buy AMT or ITM puts. If you wanted to shoulder some of that expense to help spread out your capital, you could buy a put debit spread (same as vertical spread, same as bear put spread).

Buy the 145 Puts and sell the 135 Puts
This will give you a breakeven point of 142 while risking $305 for a reward of $695. This has a decent risk/reward ratio. The breakeven point refers to 'at expiration'. Ideally, UNP would pullback in one week, you could liquidate your position, lock in 80% of your potential profit, and remove 100% of your risk.

You could buy the 145s and sell the 140s. This will give you a breakeven point of 143 while risking $190 for a reward of $310. Your probability of success goes up (higher B/E point) but your risk/reward ratio goes way down. It's a constant trade-off, as always with options, between risk and reward.