Today’s Bounce Presents Option Trading Opportunities.

February 12, 2008

This morning, the is trading higher on positive news from the financial sector. Warren Buffett has offered to reinsure bond insurers. In essence, this move would keep their AAA credit rating. My is focused on ITM call buying in the strongest stocks.

The market likes the fact that someone is willing to step up to the plate and take risk. However, this offer only addresses the strongest part of the bond insurer’s portfolio – municipal bonds. The companies are not likely to go along with this deal since it will strip them of the best part of their business. The CDO’s are what the market is concerned about.

Another positive development in the financial sector is that a consortium of six of the nation’s largest banks has agreed to extend foreclosures by 30 days. This will give homeowners more time to renegotiate their mortgages. Any development in this area is a positive. However, the larger issue is that many people might not be able to afford the mortgage even after refinancing. Even if they could afford their home, it might have dropped in value and it would not make sense for them to refinance at any rate.

The bottom line is that the market is looking for some good news in the financial sector. Those stocks are weighing on the market and any support could be the catalyst the market needs to stage a bona fide bounce.

As I outlined yesterday, I feel that the second retest of SPY 133 could hold and we might actually see a sustained rally. The VIX tried to retest and it hit resistance at 30. Today it is backing off. My first target and second target or outlined in today’s chart.

We still have “Fed speak” Thursday. That and option expiration are likely to translate into market volatility. If today’s move continues higher into the bell and we see constructive price action tomorrow, a nice move higher will materialize.

That’s the way I’m trading it and I am long energy, agriculture, mining, and some tech. Use the SPY 134 level as a stop.
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February 11, 2008

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