Sell Out of the Money Put Spreads – Know That You Might Take Heat 1 More Time

Posted 12:30 PM ET - We've seen some big market moves this week. The SPY fell sharply Monday and we tested the closing low from August (SPY $187.20) on Tuesday. That support level attracted some buying and stocks rallied yesterday. This extreme market volatility should subside in coming weeks. Q3 window dressing is over and the debt ceiling is behind us. Earnings season will start in a couple of weeks and that will attract buyers. The official PMI in China was better than feared. ISM manufacturing was weak and that has been the trend the last couple of months. ISM services should be decent and the jobs report should come in around 190K tomorrow. The Fed wants to hike rates in 2015 and that dark cloud will loom over the market. Economic releases need to be good. If they are dismal and the Fed insists on tightening, we will get hit with a double whammy. I still believe that we will have one more nasty round of selling. It should breach SPY $187.20 and it could challenge $182. That move should be very brief and I expect to see a massive intraday reversal. That will be a sign that Asset Managers are ready to buy and we will have a nice rebound that should take us back to SPY $200. If by chance, the market finds support I want to have some trades working right now. With 30 point S&P moves back and forth, there is only one strategy that makes sense. I am selling out of the money put credit spreads below major support levels. I am looking for stocks that have been strong relative to the market and I am prepared to take some heat. This strategy allows me to distance myself from the action and I can take advantage of time decay. This back-and-forth noise will not affect me. The price action today is weak. The pessimism is high and I think earnings season is the only thing that can improve the mood. I will be day trading from the short side today. I am scaling into bullish put spreads knowing that I might take some heat. I am willing to add on the way down and I will watch for the capitulation low. Once I see it, I will get much more aggressive on the long side. Once I see that final washout I will also short the VXX. We still have a week or so of negative price action to get through. . .

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