Santa Claus Rally? Play It Safe and Sell OTM Puts On Strong Stocks.

December 24, 2008
Author: Peter Stolcers, Founder of OneOption

Since testing upper resistance at SPY 91 a week ago, the market has been in a slow steady decline. The Fed's target of 0% to .25% for the Fed Funds rate did not provide a long-lasting boost for the market. After yesterday's light volume decline, we are right above the horizontal support level at SPY 85. The VIX has continued to decline over the past week but it is still at elevated levels. The economy continues to deteriorate and I doubt that it will fall below 30 in the next few months. This morning, we learned that durable goods orders declined by 1%. That was less than the 3% analysts expected. If you strip out transportation, durable goods actually rose 1.2%. October's number was revised downward by 1.5% and durable goods actually fell by 8.4%. As you might expect, people are not purchasing big-ticket items. The personal savings rate rose by 2.8% in November. That reverses a 20-year decline in the personal savings rate. This is a step in the right direction and we need to continue this trend for many years. Initial jobless claims rose by 30,000 to a 26-year peak and 586,000 people filed for state unemployment last week. This number has become a weekly barometer and the monthly Unemployment Report is the most influential piece of information. A continued rise in unemployment will increase our national debt and it will put even more stress on our fragile financial system. Next week is light on earnings and economic releases. Traders will be taking time off after a hectic year. The market has fallen into a relatively tight trading range the last few weeks and it is unlikely that we will see major fireworks during the last few days of 2008. This all bodes well for a Santa Claus rally. Asset Managers will try to "goose" the market with buy orders. They won't fight resistance, but if the sellers step back, they will continue to push the market higher. In today's chart you can see the tight trading range that has formed. I believe a Santa Claus rally could take us to SPY 91. It typically lasts for five trading days after Christmas. I don't have enough faith in this market to get long, but writing naked puts and selling out of the money put credit spreads on strong stocks make sense. If the market does not rally, the implied volatility is likely to decline and time decay will erode premiums. This is the best strategy right now. May you and your family have a blessed holiday season! image

Daily Bulletin Continues...

Want Full Access?

Become a Member

Start Free Trial

No credit card required.


Previous Bulletin

December 23, 2008

Next Bulletin

December 26, 2008