Follow This Options Trading Strategy the Rest of 2014 – Quad Witch – Expect Choppy Trading

December 19, 2014
Author: Peter Stolcers, Founder of OneOption

Posted 9:45 AM ET - Wednesday night I hosted a webinar and we found at least 10 new trades that are setting up right now. CLICK HERE TO WATCH THE WEBINAR RECORDING The S&P 500 has rallied 4.5% in the last two days. We experienced a nasty decline and a violent snapback rally. We are right back where we started a couple of weeks ago and if you were on vacation you might think that the market has been quiet. I did not like to set up when we were making new all-time highs a few weeks ago. The volume was extremely light and the market was not able to advance. My plan was to distance myself from the action (sell out of the money put credit spreads) and to play it safe (keep my size small). I felt that seasonal strength would keep a bid to the market. Conditions deteriorated rapidly and I was forced to actively hedge my positions. I still make money, but I had to work a lot harder than I expected to a few weeks ago. This type of market volatility should continue in 2015. We will need to buy dips, take profits on the rebound and short rips. As long as the uptrend is intact and the major moving averages (100 day and 200 day) find support, the most profitable trades will come from buy dips. On the positive side of the ledger, US economic growth is strong, corporate profits are robust, low gasoline prices will boost consumption and the Fed will remain accommodative. Bond yields are near historic lows and equities are attractive on a relative basis. US equities will also benefit from a flight to safety. On the negative side of the ledger, credit concerns could flare-up at any moment. Sovereign debt levels are extreme and one domino could set off a chain reaction. Russia is on the ropes and it does not have any allies. The ECB is out of bullets and interest rates are already in negative territory. Economic conditions continue to slip and PIIGS will become a challenge for the ECB. Japan has thrown the kitchen sink at its economic slump and QE is not bearing fruit as deficits skyrocket. As the money printing continues global credit markets will become more exposed to an outside event. The collapse in oil prices the Ebola outbreak were two potential Black Swans in 2014. Apart from credit concerns, a decline in China's economic activity would be devastating. They are now the largest economy in the world. Their flash PMI's were weaker than expected, the PBOC lowered rates in a surprise move a month ago and commodity exports declined 25% month over month. Their GDP growth expectations were lowered to 7% for 2015. Most analysts agree that the hyper growth in the last decade has resulted in excess capacity and a housing bubble. China's shadow banking industry (unregulated financial institutions) is as large as its regulated banking industry. This year we started to see some cracks in the dam. The market climbs a wall of worry and the last two months of trading will be representative of the price action we can expect next year. The good news is that there will be opportunities on both sides of the market. Central banks will continue to ease. As long as credit concerns don't escalate and China's economy is able to maintain 7% growth, the market uptrend will continue. The news will dry up next week. Durable goods orders and GDP will be released. Trading volumes will collapse and the market will drift higher. Money Managers make bonuses when the market moves higher and even a small bid can push stocks higher. I am keeping my size small, but I do have some positions on. I am focusing on stocks that are in an uptrend. When the market was selling off, the stocks consolidated into a tight range and they held support. Now they are breaking through horizontal resistance. I am selling at the money put credit spreads if the premiums are rich with the expectation that the breakout will hold. In cases where the option premiums are reasonable, I am buying in the money calls that trade with a delta of .8 or higher. Both strategies will benefit from a gradual grind higher and I am using the breakout as my stop. This is a quadruple witch so you can expect a choppy day. . . image

Daily Bulletin Continues...

Want Full Access?

Become a Member

Start Free Trial

No credit card required.


Previous Bulletin

December 18, 2014

Next Bulletin

December 22, 2014