Tuesday’s Stock Option Trading Strategy!

Option trading programs could support the market this week. Wait for support, then buy call stock options on commodity stocks. Yesterday, the market took a breather as banks started to take subprime write-downs. A few weeks ago the market was supportive when losses were identified. Now that reality has hit, investors are less understanding. This morning there were a number of earnings releases that had a negative tone to them. JNJ, ERIC, WFC and KEY were among the disappointments. Industrial production increased by .1% as expected. Industrial output increased at a 4% annual rate in the third quarter, its fastest pace in a year. With the exception of the Shanghai Index, global markets were trading lower overnight. This weakness combined with record highs in oil are weighing on the market. There are clearly more negative checkmarks on the bearish side of the ledger today. After the close we will get earnings from STX, IBM, YHOO and INTC. I'm not looking for any surprises from this group. Tomorrow, before the open, we will get earnings from ABT, KO, ITW, and UTX. This is a good group of stocks that should show positive results. We will also get results from CIT, DSL, GCI, JPM, MAN, MTG, and PJC. This is a rather weak group of stocks. The overall market impact from all releases should be neutral. I believe the market's direction will be determined by financial stocks. The write-down news should not be a shock to anyone. We'll see how the market reacts to the actual event. I don't believe a sustained rally can materialize without some participation from these stocks. For today, the market has been able to rebound from an early low. The impetus is to the downside and if the market makes a new daily low this afternoon, it will slide right into the close. If the market can stay above SPY 154, it has a chance to tread water at this level for a few more days. Option expiration has tended to be bullish and that could help to support prices. Keep in mind that option expiration programs will only occur if the market is able to sustain a nice grinding directional move throughout the day. When this occurs, traders leg out of hedged positions and they effectively "goose" the market. Commodity stocks are pulling back. They have had enormous gains and as I mentioned yesterday, you should be taking profits. My best approach to this market is to wait for support and to re-enter commodity trades. This has been and will continue to be the strongest sector.

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