Stock Option Trading Strategy: Bullish put spreads and bearish call spreads with SPY 141 – 146.

April 3, 2007
Author: Peter Stolcers, Founder of OneOption

Over the last 4 months the market has had the ability to drift lower for a week and snap back in one day. That is exactly what is happening today. All of the negative price action and from the last week has been wiped out today. The SPY is testing the highs made after the FOMC meeting. Iran is trying to ease the tension, but it is not backing down. The rhetoric has oil prices trading lower and that is helping the market to rally. This alone is not enough to justify the move. Global markets are rallying and in some cases, they have made new highs. The US markets are playing catch-up. Retirement accounts are being funded before April 17th; and that cash is being put to work. Beginning-of-the-month fund buying is also playing a role. Like myself, there are shorts that are getting squeezed as well. The market ran up to SPY 143.60 with ease and it has been able to hold that level. If the level represented true resistance, sellers would have jumped on the opportunity to slap bids and the market would have retreated quickly. Instead, buyers are gauging just how strong the offers are and they are wearing down the sellers. The A/D is a very positive 3:1 and I believe we will see a move up near the close. The next resistance level is SPY 146. I still believe that the risk today is higher than it was 3 months ago. Interest rates are moving up, housing is weak and earnings growth rates are slowing. Al Qaeda and the Taliban have regrouped and our country is divided on our war efforts. The market is oblivious to these changes. For today, there is a better chance for a new high than a reversal. From a stock option trading perspective, I am still neutral. If the market easily tests SPY 146, I will reel in my bearish call spreads. I will not go long until I see that the new high has held for a t least two weeks. I will establish a few new bullish put spreads, making sure they are out of the money with plenty of cushion. If by chance there is an afternoon reversal, it would be a victory for the bears. I would put that probability at about 20%.image

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