Your Long Term Out of the Money Puts Will Pay Off – Be Patient!

August 29, 2010
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market rallied on better-than-expected initial jobless claims. This week, 473,000 new claims for unemployment were filed. That was 25,000 less than a week before, but this was not a good number. The market rallied early in the day. That move ran out of steam and sellers unloaded stocks in the afternoon. The market drifted down to major support ahead of the GDP release. This morning, Q2 GDP was revised down to 1.6% from 2.4%. Analysts were expecting 1.4% and the market rallied on the “beat”. Although the revision was better-than-expected, this was not a good number. The market is starting to drift lower this morning, just as it did yesterday. The Fed Chairman will be speaking at an economic conference in Wyoming this morning. He is likely to state that economic conditions are deteriorating and that the Fed will do whatever it can keep our economy of slipping into a double dip recession. Unfortunately, quantitative easing will have little impact. Interest rates are already ridiculously low and consumption continues to decline. Americans are tapped out and savings rates have declined for 20 years. Baby boomers are approaching retirement and on average they have $80,000 saved. If interest rates were at 0%, it wouldn't matter. They are leveraged up to their eyeballs and banks don't like personal balance sheets. That is why they aren't lending. Some analysts are suggesting that the government force banks to lend money – idiots. Over-extending credit is what got us into this mess in the first place. Consumer sentiment improved slightly from July's level, but it is still very low. A month ago, it hit a level not seen since November 2009. If the economy continues to deteriorate, many homeowners will simply hand their keys over to banks and stick them with huge real estate losses. A year ago, the government tried to keep people in their homes by forcing banks to hold off on foreclosures. Now, they might have to keep people from walking away. Imagine the write-downs financial institutions would take if this practice catches on. It could cause another credit crisis. Next week, major economic news will be released. China will release its PMI on Tuesday and that will spark fear. It is likely to show economic contraction and the world is counting on China to pull us out of this recession. Two weeks ago, the market tanked when China reported slower imports. A PMI below 50 would be even more damaging than that was. Employment conditions are deteriorating and ISM manufacturing and ISM services are likely to decline. The market is seasonally weak in September and credit concerns in Europe are starting to flare up. All of these negative influences are converging at the same time and a significant decline lies ahead. If the SPY closes below major support at 105 today, the table will be set for the next down leg. If you have been following my comments, you are sitting pretty on a boat load of long-term out of the money puts. You've been scaling in and your entry price is low. This will give you staying power. If you don't own any puts, buy some. We are set up for a nasty week of trading. image

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