Sell Bullish Put Spreads – Support At SPY $195 Should Hold Thru March Expiration

March 2, 2016
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - Central bank easing pushed the SPY through horizontal resistance at $195 and that sparked additional buying yesterday. The market was able to shrug off China's dismal PMI and once the momentum was set, it never looked back. I was waiting for an opportunity to short the rally yesterday morning, but the move never stalled. This breakout will lead to excellent trading opportunities. We were on the verge of falling into a tight range ($190 - $194) since the news will taper off. Now that we are clearly above $195, we will challenge horizontal resistance and the 100-day moving average at $200. ADP reported that 214,000 new jobs were created in the private sector during the month of February. That was better than expected. ISM manufacturing was slightly better-than-expected yesterday. We need ISM services to come in above 53 tomorrow and we need 180k jobs on Friday. These numbers would show economic stability and the Fed would maintain dovish rhetoric on March 16. We can lean on support at SPY $195. That is a critical level and the market was going to break one way or the other this week. Once it was apparent that we were going to rally above it, I started selling out of the money put credit spreads yesterday. I outlined this in my comments. If economic numbers hit the levels I mentioned (likely), the market should be able to stay above SPY $195 through March options expiration. I am not buying call options because the upside is fairly limited. We are one good day away from major resistance. Option premiums are still pretty rich and I don’t want to be exposed to time decay if we stall here. From a day trading standpoint, I am seeing great opportunities on both sides of the market. If stocks open flat, use the first hour range as your guide. If the market gaps higher on the open, favor the short side early in the day. If the market gaps lower, favor bullish trades early in the day. Macroeconomic conditions are deteriorating on a global basis and the selling pressure this year has been heavier than I've seen in years. Central bank money printing has temporarily stopped the bleeding, but this sugar high will not last long. I still believe the next big move is on the downside and I am watching for signs of exhaustion. I will passively join this rally. When the market does falter, we can use SPY $195 as our entry point for shorts. If the market rallies above SPY $200, we will use that as our entry point for shorts when the market reverses back through it. Sell out of the money bullish put spreads. Look for stocks that have broken through horizontal resistance and use that price point for your stop. If the stock falls back below the breakout, buy back the put spread. These horizontal breakouts tend to produce a sustained moves and follow-through buying will give you some breathing room in the next few days. Day trade and use the first hour range as your guide. I didn't know if the market had enough strength to challenge SPY $200. We have the breakout we were hoping for and this will eventually set up an excellent shorting opportunity. We need to be patient and trade this breakout. . . image

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