The Daily Trading Range Should Start To Decline – Sell OTM Puts!

December 9, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market opened higher and we had a follow-through rally from last Friday's reversal. Over the last two weeks, we've seen the market shrug-off bad news and many analysts believe that worst-case scenarios are priced in. Overseas markets also rallied and they provided impetus for yesterday's open. The market continued to grind higher throughout the day, but it pulled back near the close. Rumors were circulating that the Big Three bailout was hitting a few snags. After the close, that was confirmed. Federal Express and Texas Instruments both warned after the close yesterday and that news weighed on today's open. Within the first 30 minutes, the market had reversed early losses and it moved into positive territory. By mid-morning, the action has slowed down and we might actually get a quiet day. The SPY 85 support level is firm and traders are easing into long positions. However, the market has rallied more than 10% from its lows a week ago and traders don't want to get ahead of themselves. Earnings and economic releases are fairly light this week and there aren't many "drivers". The FOMC meeting next week won't provide any significant movement either since the kitchen sink has already been thrown at the credit crisis. We are likely to see a more normal trading pattern and I expect the volatility to drop off. We are in a seasonally bullish period and that might spark a short covering rally. If the SPY can move through the 100 level in the next two weeks, we might see a light volume run-up to SPY 110 at year-end. I view this as possible, but unlikely. If we reach that level, I will be looking for shorting opportunities. Today's range has probably been established. The market’s resilience and the high option implied volatilities still favor put writing. Distance yourself from the action and let time take care of the rest. Make sure to use stocks that have firm support levels. If the Big Three bailout is finalized, it is likely to have a bullish impact on the market initially. Longer-term, the debt created by the bailout will weigh on the market. The government will be trying to figure out how to get the genie back in the bottle as new bailout candidates line up. Trade any rally with caution and know that you are going against the intermediate term downtrend. image

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