Friday’s Stock Option Trading Strategy!

January 4, 2008

The is taking a beating on the weak . Add put debit spreads to your strategies.

If you’ve been following my advice, you’re making money. All week I have been preparing you for a dismal Unemployment Report. As predicted, bad news is bad news.

The FOMC does not take place until the end of the month and the market will be trying to second-guess Fed policy for the next few weeks. A .25% rate cut has already been factored into bond prices. Next week, the economic releases are fairly light and today’s bad news could fester.

Inflation is heating up and the Fed is painted into a corner. It may be forced to let this economic cycle run its own course. If that transpires, you will see the spillover effect of the subprime mortgage crisis. Politicians, economists and analysts are quick to place blame for today’s woes. Personally, I believe we are all individually responsible. As a country, we continue to spend more than we make.

Over the last 17 years, our personal savings rate has dropped from 8% to zero. In fact, for the last two years our savings rate has been negative. How much longer can we expect to spend more than we make. On a fiscal basis, the government has done the same and lenders no longer hold up their hand.

As a trader, let’s make some money as the market declines. As you can see in today’s chart, significant support levels have been breached. The large horizontal support level at SPY 146 is gone, the market has broken a five year uptrend line and it is trading below its 200 day moving average. These are all significant developments and I believe we could test November’s lows as early as this afternoon.

It is possible that there will be a few bounces early this afternoon. I would view them as shorting opportunities and they expect weakness right into the bell. Buyers will not stand in front of this freight train going into the weekend. Overseas markets are likely to follow suit Sunday night and that will present a weak backdrop has trading resumes Monday morning.

As I mentioned in yesterday’s comments, you can add put debit spreads to your options strategies. Retail, restaurant, regional banks and REITs are my favorite shorts.
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