Stock Option Trading Strategy – Wait for a breakout or breakdown. Use key levels as your guide.

September 18, 2007
Author: Peter Stolcers, Founder of OneOption

This morning the market is reacting to a "light" PPI number and better than expected earnings from LEH. The light PPI number will allow the Fed to ease with confidence. However, I question the validity PPI number. Commodities prices and hourly wages are on the rise here and abroad. LEH was considered by most to have the greatest subprime exposure. There are analysts that believe they have not fully marked down their holdings and the full extent of the damage is still not revealed. I believe the Fed will lower rates by .25%. They will also lower the discount window rate. Those actions will be tempered by rhetoric that includes "inflation concerns". The market will not receive that well and it might have an initial negative reaction. Given the backdrop today, I feel that any pullback will represent a buying opportunity. The market looks strong. As you can see in the chart the market has gradually worked its way back and it is now trading above resistance. If the market closes at or above this level we are headed higher. If the market closes below SPY 146 you should go to a neutral position. Do so by shorting weak stocks or by getting out of some of your long positions. If the SPY drops below 144, take a bearish stance. image

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