Editor's Note:

Investors are starting to get spooked by the approaching debt ceiling deadline and no deal in Washington. Stocks accelerated lowered today. If lawmakers managed to get it together and produce a deal the market could rally. Yet a deal is not a guarantee the U.S. will avoid a credit rating downgrade. If we do lose our AAA trading then stocks would most likely fall.

You might hear some market pundits tonight and tomorrow talking about Dick Bove's dramatic call today. Bove is a widely followed banking analyst. He is suggesting investors sell everything and go to cash due to the weakness in the U.S. financial system and insurmountable debt issues. Essentially he feels there is no safe haven investment right now.

We are adding some market neutral trades tonight. I mentioned this idea last night. You don't have to trade them all. Pick the index that best suits your trading style.

- James


NEW MARKET NEUTRAL OPTION PLAYS

SPDR Dow Jones Industrial Average (ETF) - DIA - cls: 122.84 chg: -1.99

Stop Loss: n/a
Target(s): -----
Option Straddle Gain/Loss: + 0.0%
Option Strangle Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Commonly called the Diamonds, the DIA is the ETF that tracks the Dow Jones Industrial Average. I am suggesting a couple of market neutral trades. Stocks could see some wild swings over the next several sessions as the debt ceiling deadline approaches.

I'm listing both a straddle and a strangle. We're using August options that expire in less than four weeks. Readers may want to consider September options instead.

NOTE: If the DIA gaps up or down at the open tomorrow by more than $1.00 then we'll adjust our entry point to the closest strikes available (example: if the DIA gaps open lower near $120 then we'll use the $120 or $121 strikes for the straddle instead). On a gap open we'll adjust the strikes for our strangle as well (if the DIA gaps open at $124 then we'll adjust our strikes up $1.00).

Trade #1. Option Straddle

BUY the AUG $123 call (DIA1120H123) current ask $2.23
- and also buy -
BUY the AUG $122 put (DIA1120T122) current ask $2.30

- or -

Trade #2. Option Strangle.

BUY the AUG $127 call (DIA1120H127) current ask $0.58
- and also buy -
BUY the AUG $117 PUT (DIA1120T117) current ask $0.98

NOTE: you may want to buy three calls for every two puts if you're trading the strangle due to the price difference.

Annotated Chart:

Entry on July 28 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 6.6 million
Listed on July 27, 2011


iShares Russell 2000 Index - IWM - close: 79.97 change: -2.46

Stop Loss: n/a
Target(s): --
Option Straddle Gain/Loss: + 0.0%
Option Strangle Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We are applying the same strategies we listed in the DIA trade to the IWM small cap ETF. We'll list both a straddle and a strangle using August options. If this ETF gaps open more than a $1.00 tomorrow morning we'll adjust our strikes appropriately.

Readers may want to consider September options instead.

Trade #1. Option Straddle

BUY the AUG $80 call (IWM1120H80) current ask $2.20
- and also buy -
BUY the AUG $80 put (IWM1120T80) current ask $2.33

- or -

Trade #2. Option Strangle.

BUY the AUG $84 call (IWM1120H84) current ask $0.58
- and also buy -
BUY the AUG $76 PUT (IWM1120T76) current ask $0.96

NOTE: you may want to buy three calls for every two puts if you're trading the strangle due to the price difference.

Annotated Chart:

Entry on July 28 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 60 million
Listed on July 27, 2011


SPDR S&P 500 ETF - SPY - close: 130.60 change: -2.73

Stop Loss: n/a
Target(s): --
Option Straddle Gain/Loss: + 0.0%
Option Strangle Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We will apply the same market neutral strategies to the SPY. I'm suggesting an option straddle or an option strangle. We'll use the August options, which expire in less than four weeks. Readers may want to consider using September options instead.

If the SPY gaps open more than $1.00 from current levels then we'll adjust our strikes by the same $1.00 move.

Trade #1. Option Straddle

BUY the AUG $130 call (SPY1120H130) current ask $3.05
- and also buy -
BUY the AUG $130 put (SPY1120T130) current ask $2.63

- or -

Trade #2. Option Strangle.

BUY the AUG $134 call (SPY1120H134) current ask $1.10
- and also buy -
BUY the AUG $127 PUT (SPY1120T127) current ask $1.68

Annotated Chart:

Entry on July 28 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = xxx million
Listed on July 27, 2011