Thursday’s Stock Option Trading Strategy!

January 3, 2008
Author: Peter Stolcers, Founder of OneOption

The has broken key support levels. Focus your on call credit spreads. Yesterday, the market posted its worst dollar loss for the first trading day of the year – ever. Typically, the market starts the year off on a positive note. A weak ISM Manufacturing number raised recession concerns and with rising inflation, the Fed will be reluctant to ease rates. The market continued to decline the entire day and critical support levels have been breached. The SPY is trading below its 200 day moving average and it is below significant horizontal support (146). It is also on the verge of breaking below a five-year up trend line that dates back to 2002. The SPY 145 level needs to hold for the trend line to stay intact. As you can see in the chart, the last four trading days have closed near the low of the day. What makes this concerning is that this is normally a very bullish time the year. In the chart I've also been making reference to the down trend that started in October. Given these developments, I believe the market is going to test the lows from November. All eyes will be fixed on tomorrow's Unemployment Report. A weak number could spell disaster for the market. With high debt levels and rising inflation, consumers are tapped. If they start losing their jobs, we are headed for a recession. Today, the ADP employment index and the initial jobless claims number where "in line". The overseas markets were generally lower overnight with the exception being China. There is not much news for the market to trade off of and I believe we will see an early range and choppy trading. If the market makes a new low after 11:00 am CT, it is likely to continue lower the rest of the day. Fear is the dominant emotion in the marketplace right now and there is a chance for a sell off this afternoon ahead of the number. I still believe the best strategy at this juncture is to sell out-of-the-money call credit spreads on weak stocks. If the market breaks below SPY 145 tomorrow, consider buying some put debit spreads. With the elevated implied volatilities, this is a spreading environment. image

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