Wednesday’s Stock Option Trading Strategy!

December 12, 2007
Author: Peter Stolcers, Founder of OneOption

Yesterday, I provided specific instructions on how to approach the FOMC announcement. I hope you took advantage of the situation. It took the market about five minutes to breach the SPY 150.80 level. Once it was broken, the market fell apart. I took my five weakest stocks from the top of the Daily Report Live Update page (MTB, WYNN, SHLD, TIN, PCAR) and calculated that you could have made about $1250 if you would have shorted just 100 shares of each and bought them back near the close. The day trading margin requirement for the stock positions would have been about $10,400. That's a nice two hour return. I also mentioned that this market was setting up for a day trade. The option bid/ask spreads are too wide for day trading and you really needed to take a position in the underlying stock. This morning, the S&P 500 futures were up 36 points on the open, reinforcing the concept of a day trade. A tremendous struggle between the bulls and the bears has emerged. Year-end strength and a 5-year bull market are valiantly fighting off deteriorating economic conditions. The Fed is doing what it can, but rate cuts are not packing any punch. LIBOR rates (the true cost of capital) remain high and the market is already looking for its next "fix" the day after a .25% rate cut. Inflation and a weak dollar have the Fed handcuffed. Consequently, I believe this economic cycle will have to run its own course. The depth of the credit crunch is unknown and the bulls and the bears will be battling this out for many months. The market wanted a .25% rate cut and “dovish” statements that would pave the way for a future rate cut. The Fed did not provide the later as it maintained a "give you an inch, take you a mile" attitude to keep the market honest. If they said that another quarter-point rate cut was likely, the market would instantly be looking for a half-point rate cut. I believe the Fed also knows that it is "firing blanks". It might as well save its ammunition for the time being. The opening rally is slowly starting to fade and I believe that a full-blown reversal could materialize this afternoon. The PPI/CPI, retail sales and earnings from Lehman could all weigh on the market. As I've said before, the headwinds are blowing strong. If the market breaks below SPY 149, go short. I also like selling out of the money call credit spreads on stocks that have been in a downtrend for the last four months and have bounced with the market. Look at the chart from yesterday and make sure that the stock was hit hard once the selling set in. image

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