The Bounce Is Coming – Sell OTM Put Options – Now!

Last week, the market fell right back down to its support level at SPY 85. The decline took place on lighter volume, indicating that a lack of buying is more to blame than panic selling. The rate of new lows also decelerated. The first $125 billion from the Fed bailout will reach banks this week. Interbank lending rates continue to fall, signaling improved credit markets. Over the weekend, Japan announced a $54 billion bailout package for its banks. Governments around the world are addressing liquidity issues and for the time being, a financial collapse has been averted. This does not mean that all is well. We still have tight money and dire economic conditions to deal with. Banks might be dealing amongst each other, but new commercial loans are hard to come by. Last month, clients withdrew $46 billion from money market accounts held at Morgan Stanley. The investment bank headed by $23 billion of securities to keep them afloat. This week, the Fed will start buying commercial paper at 2.88%. We have to walk before we can run and short-term liquidity needs to be addressed before longer-term loans will materialize. The credit squeeze has placed a stranglehold on businesses and that will have an impact next quarter. For the current quarter, earnings have been decent. Excluding the financial sector, earnings on the S&P 500 are up 10% for the quarter year-over-year. The guidance has been light and companies that have exceeded earnings estimates are declining on cautious fourth-quarter statements. As I outlined last week, I have reason to believe that a short-term bounce will materialize this week. I am selling OTM puts on stocks I like. I am distancing myself from the action and I suspect that many asset managers who want to buy stocks are using this strategy as well. The Unemployment Report will not be released for almost 2 weeks, giving us plenty of time to bounce before new concerns arise. The last week in October is historically very bullish. This is a strategy that you have to execute now. Once the rally starts, the implied volatility will immediately sucked out of the options. By nature, you are already playing it safe by distancing yourself from the action. This is not a time to get bullish, it's simply the opportunity of a lifetime to sell OTM puts.

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