Stock Option Trading Strategy – Range bound today. Short weak stocks that bounced big Tuesday.

September 20, 2007
Author: Peter Stolcers, Founder of OneOption

All things considered, the market is holding its gains relatively well. Yesterday the market rallied in response to a huge overnight jump in overseas markets. It also reacted to an "in-line" CPI number. After making an initial surge, the market quieted down and pulled back near the close. This morning the market tested the downside as overseas markets were down overnight. Earnings from GS and BSC gave early support to the market and the subprime lending woes were not as bad as expected. GS is up marginally and BSC has recovered from an early drop. It is now trading near yesterday's high. FDX also announced this morning and although there earnings were in line, the guidance was weak. Transportation is often used as a guide to economic activity. As you can see in today's chart, the market established a high yesterday. Using that high and the high from Tuesday, we have a trading range. If we get a breakout in either direction I would follow it today or tomorrow. The more likely scenario is that we will stay in this range. The market needs a few days to digest the news. There is a bias to the upside due to the open interest of in-the-money call options. However, I believe that there is enough skepticism to keep a lid on prices. Some traders are wondering why the Fed took such dramatic action and others are reviewing the statements made by FedEx. I still believe that shorting stocks that are in a downtrend (excluding financials) and had a big short covering bounce on Tuesday are the best play today. If you use this tactic, make sure to have tight stops and take your cue from the financials. This market won't go anywhere without help from the financial stocks and if they start making new highs for the day, cover your shorts. I know that this is a very short-term tactic. In this environment I think it is best to let things settle down before initiating longer-term positions. image

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