Stock Option Trading Strategy – long calls on energy stocks and bull put spreads on heavy equipment.

May 30, 2007
Author: Peter Stolcers, Founder of OneOption

The "China Syndrome" strikes again. This time the impact is much more muted than it was in February. The Chinese increased a stamp tax that they collect on stock transactions from .1% to .3%. That's right, a two tenths of one percent increase. News sources are sensationalizing the event by emphasizing that the rate has tripled. The market reacted and the Shanghai Index lost 6.5% overnight. Personally, I believe the increase will mean little to traders. The greater take away is that the Chinese government can change the rules of the game in an instant. Other foreign markets were soft, but held up relatively well. Anytime an asset (or market) has a parabolic run up, the slightest issue can lead to a sell off. This news was already out in the marketplace yesterday. Our market had an initial negative reaction, but by mid-morning prices have rallied off of their low. With the lack of other news, the market will remain very choppy. End of month buying should lend support to prices. Most traders are unlikely to place big bets before Friday's Unemployment Report. The energy stocks are holding up well and I feel very comfortable owning calls in that sector. I have also started writing puts on some of the heavy equipment stocks. For the next two days, expect directionless trading.image

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