Monday’s Stock Option Trading Strategy!

The stock market is quiet ahead of the PPI. My current option trading includes short term earnings related call purchases. Overnight, foreign markets traded lower in reaction to Friday's sell off. Our market was poised for a small rebound after IBM preannounced with better than expected results. Over the next few days we will hear from many financial institutions. There are bound to be many new write-downs and layoffs. I feel that most of the negative news has already been factored into this sector and I'm not expecting these stocks to get pounded down from their current levels. I am also not expecting them to have a sustained rally. It's possible that they will bounce and as the quarter draws on, they will resume their downtrend. The lending problems will take many months to resolve. Tomorrow, before the open, the PPI will be released. Inflation has been trending higher and I am expecting a "hot" number. The market will not receive the news well because it will limit how much the Fed can lower interest rates. Currently, a .5% rate cut is already factored into bond prices. The market feels a bit oversold at the current level and I a.m. expecting a rally up to the SPY 145 level in the next two weeks. After that, the rate cut will be behind us and weak economic numbers will continue to pressure the market. My longer-term strategy is still to buy put diagonal spreads (buy back month ATM, sell front month OTM). In the short term, I am buying February calls on stocks that trade at low P/Es and generate a large portion of their revenues overseas. I want to see positive revenue growth over the prior three quarters and I want to make sure that these stocks have pulled back to a support level. That is what is going to give them they upside earnings pop I'm looking for. It is also important that these stocks are in a long-term uptrend and that they are still above long-term support. For today, expect quiet trading.

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