Monday’s Stock Option Trading Strategy

The stock market but it won't last. My option trading is focused on put diagonal spreads today. I’m sorry the Live Updates are not populating today. I have an internet outage in my area and my servers are not able to pull data. Panera’s is my office today and I am glad I took that stock off of my short list. They do have great food and great WiFi. BTW, lunch business is brisk. The market is trying to bounce after Friday’s bloodbath. The employment picture is deteriorating and that will weigh on the current credit crisis especially if the trend continues. Overseas markets were weak in response to our sell off. This morning, support at SPY 140 was successfully tested. However, I don’t believe it will hold. This decline has taken place during a seasonally bullish period and the last bounce we had was VERY weak. Compared to the declines in February 2007 and August 2007, the current one is more severe and methodical. The declines have lasted longer and we have not seen the big washouts and swift snap back rallies. There are serious issues that need to be resolved and this time around, there is an actual “body count”. Financial firms are taking huge write-downs and they are trying to assess the damage. The Fed fears inflation and future rate cuts will be curbed. I believe the market has a lid on it. Profit growth slowed to 2% in 2007 vs 8% in 2008. Rising materials costs and higher labor costs are impacting margins. For today, we may see a decent bounce. I do not expect it to last. If the market goes negative this afternoon, go short. There is not much economic news this week and the earnings are rather insignificant as well. The path of least resistance is down. I am buying some March/Jan diagonal put spreads. I believe the market will continue lower in the first half of the year and I want to take advantage of the higher IVs by selling Jan options. In short, I am buying closer to the money March puts and selling the next strike out Jan puts.

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