Off the bat, some trading advice.

On May 23^rd of this year, we recommended a zero premium trade that pitted the Royal Bank of Scotland (NYSE:RBS) against J.P. Morgan (NYSE:JPM). Our thinking at the time was that Royal Bank of Scotland had tremendous exposure to Greek debt while Morgan had (almost) none. If there was further trouble, we expected RBS to drop faster than JPM. That week's letter, 'Playing Relative strength with American Banks', also explained that RBS's exposure to Greece was as much as 12% of the firm's value.

Two month's later we're cashing in. On a trade that cost no money but commissions to initiate (the purchase and sale of the PUTS were offsetting), we're taking out $100 per pair traded. JPM's August 38 PUTS now sell for $0.55, while RBS's August 12.50's are fetching $1.55. Our advice to all who opened the trade is to close it out immediately. And congratulations.

How Deep Can You Go?

A slightly longer word now, on our three time recommendation to purchase long-dated, deep-in-the-money SPY CALLS.

A deep-in-the-money (DITM) option is one that possesses no time value. It trades for precisely the difference between the strike price and the value of the underlying security.

The purpose of such a purchase is a) to minimize inevitable time-value losses that accrue if the option is held over a long period, and b) to spend less than an outright purchase of the underlying security itself. We buy these options as a substitute for stock and, in so doing, maintain a higher cash balance in our accounts to deploy if and when other opportunities arise.

Options, however, whatever their stripe, are leveraged investments, and magnify both our gains and losses when the underlying climbs and drops. This reality requires us to take two further items into consideration. The first is money management. The second is hedging risk.

Money Management

How much money should we allot to any given trade? Since trading options is manifestly riskier than trading the underlying security, the answer is always less far less. Volatility is what accounts for the increased risk (whether you're long or short) and money can be lost in a hurry.

Precisely because of this, we're never happy speculating more than 1% of our total portfolio on any given options trade, and we recommend our readers use this as a guideline for themselves. That is, on a total cash hoard of $100,000, an options bet of more than $1000 is generally unnecessary.

Why, then, have we gone ahead and recommended the SPY options not once, but three times knowing full well that DITM options are also more expensive than their at- and out-of-the-money brethren?

Glad you asked.

As you know, we are bullish on this market. The S&P500 has been rising since March of 2009, putting on over 100% since that time, and still fundamental measures of the market are anything but outlandish. The P/E on the Dow, for instance, is 14.16, and its dividend yield is 2.42 anything but overblown numbers by historical standards.

Now have a look at the Dow's monthly chart for the last five years.

Most important here are the RSI and MACD indicators, the latter of which confirmed the former's bullish break above the waterline back at New Year's. Since then, the monthly chart has been unequivocally bullish. The salient moving averages are just now unfolding and the price action is well above them all, adding further heft to the bullish read.

The weekly chart, too, speaks to more buying ahead. Here it is for the same time period:

Here, too, we have the price action located above all the moving averages, not all of which have unfurled, but which are all trending upward. RSI and MACD, too, have held above their waterlines for better than eight months save one three week period in June. In short, the weekly chart also commends a bullish reading at this point.

Here's the daily chart for the last year. Mind the strong bullish indicators here, as well:

The read here is similarly strong:

This last high did not pierce above the former high, set at the beginning of May at Dow 12,876. We therefore now have a potential double top in the making.

The daily chart will turn outright bullish only on a move above the previously noted 12,876. We're now 400 points below that level.

So, what exactly are you telling us?

The long and the short of it is that the bull looks as strong as ever, and we believe DITM options are the best way to participate in any coming upside. On a break above Dow 12,876 or S&P 500 1365 we would happily add to our positions.

Hedging Risk

As top-down analysts, we always endeavour to assess the macro picture before examining the minutiae, and in so doing, we feel we can better gauge the risk involved in our trades. By risk, we refer to the more or less calculable odds that a trade will move in our favour over a given time frame. And because we tend to trade the short- to medium-term time horizon, accuracy with the global perspective is paramount.

That said, it's all but impossible to calculate risk when you encounter a situation that bears no resemblance to anything you've attempted to measure in the past, for which no markers are available, or for which you doubt the efficacy of the tools at your disposal.

Is there a test that's been done to assess what would happen if the U.S. debt limit were not increased?

Is there a test that would determine the endgame should a country like Spain or Italy default on its debt?

Clearly not.

We have moved, therefore, from the realm of calculating risk into the much foggier precincts of uncertainty, where no models economic or otherwise operate normally.

That's why we're sticking to our guns and recommending you hold your SPY CALLS. We believe as strongly as ever that the effects of QE1 and QE2 will only start to be felt in earnest in this quarter's earnings reports, which start printing in bunches today. Here's this week's all-star lineup:

There's nothing but money, money, money everywhere you look. And now it's corporate America's turn to start showing us some of theirs.