Monday’s Stock Option Trading Strategy!

Consider option trading strategies that sell premium. Sell out-of-the-money bullish put spreads on strong stocks. Once the market finds it's footing, the implied volatilities will drop and you can consider buying call options. The financial sector is in a flux. On the one extreme you have companies like Goldman Sachs. They saw the storm clouds growing and hedged their positions. On the other extreme you have the majority of financial institutions like CFC, Bear Stearns, Merrill Lynch, and Citigroup. Analysts believe that Citigroup will take an $11 billion write-down. At first, the market wanted financial companies to aggressively write-down losses so that they could wipe the slate clean. The firms that are doing so are generating a great deal of skepticism. Investors are wondering if they really did "clean house" or if there is more to come. The rumors are running rampant and the CEOs of Merrill Lynch and Citigroup have been ousted. These concerns are hitting foreign financial stocks as well. These shares weighed on European markets overnight. In China, the Chinese Securities Regulatory Commission (CSRC) instructed several local fund houses to revise the structure of their overseas stock investment products and resubmit proposals for the lower exposure to Hong Kong stocks. In essence, they feel the Hong Kong market is over extended and they want these funds to reduce their exposure. That news created weakness in the Chinese market and the Hang Seng was down 3% overnight. Energy stocks are trading lower on news that OPEC production is up. I don't feel this should come as any surprise with oil trading at $90 a share. Everyone should be expecting them to pump oil like mad to reap profits and to keep up with demand. All things considered, the market is holding up well. Last Friday, the market was not able to rally on a very strong employment number. It tested the downside for most of the day as the bears tried to generate follow through to last Thursday's bloodbath. To their dismay, the market was able to stage a late day reversal and it finished in positive territory. This morning, the ISM services number came in better than expected. Most of the economic numbers have been coming in better than expected and they are consistent with the Fed’s statements. This market is simply going to have to work through this credit crisis. $11 billion might sound like an enormous write-down, and in most regards it is. However, to put this in perspective, it is six months worth of net income for Citigroup. It is one of the largest financial firms in the world and it will get through this crisis. I believe retail, financial and homebuilding sectors are close to bottoming out. I am not suggesting that you buy these stocks. If these three sectors find support, they will stop weighing on the market and a meaningful year-end rally can unfold. I am bullish and I am looking for opportunities to get long. As you know, I like commodity stocks and I like tech stocks. This is a great time to get long and I'm looking for the market to find its footing in the next day or two. I mentioned last Friday that you should get long on a market reversal. That event took place and today the market is trying to rally amidst a cloud of worry. If the market establishes a new intraday high after 1:00 p.m. CT, add to long positions.

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