Option Trading Strategy – Continue To Hold Calls As the Rally Continues – Use A Trailing Stop!

August 6, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, the Fed released a very balanced statement where the dangers of a recession were offset by inflationary pressures. In short, they are content to leave rates unchanged until they have more information. The market staged an impressive rally and it is challenging resistance at SPY 128.50. If it can close above this level today, it will gain momentum and the shorts will be squeezed. Oil prices continue to decline and this is giving consumers and producers a much-needed break. The rally can sustain itself as long as oil continues to retreat. Today, oil inventories came in higher than expected and energy prices are pulling back. Any speculative longs are bailing on their positions as oil forms a top. On the earnings front, Cisco posted very solid results. Global revenues more than compensated for domestic weakness. However, Freddie Mac missed by a large margin. The news initially weighed on the market. Bad news comes is no surprise in the financial sector and the market has been able to overcome early weakness. It looks poised to add to yesterday's gains. Tomorrow, the ECB and the Bank of England will disclose their monetary intentions. Global expansion is declining and for the second consecutive month, manufacturing has contracted. I believe the ECB will soften its hawkish rhetoric and there is a small chance that the BOE will lean towards easing in the next two months. That will take pressure off of our Fed and the market will have a positive reaction. For those of you who bought the SPY based on my suggestion yesterday, congratulations. Now you simply have to manage profits. I am expecting a rally tomorrow and it could gain momentum. Use a $1 trailing stop and take profits if the SPY reaches 132. I am not expecting a major rally. In fact, once it runs its course, I will take profits and I will start to scale into short positions. A global economic slow down will extend our recession and foreclosures will spread to traditional mortgages as the unemployment rate climbs. Although current interest rates are low, they will not stimulate consumption. Banks are charging a huge risk premium and the low interest rates are not flowing down to the consumer level. That will not happen until economic conditions improve and banks profits return. Furthermore, consumer debt is high and people are simply tapped out.

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