Stock Option Trading Strategy – Long calls on energy and heavy equiment stocks.

This morning the stock market is taking its lead from the Chinese market. The Shanghai Index fell more than 8% overnight and it is down more than 15% in a couple of days. The other Asian markets responded with a yawn and most of them traded higher. Contrary to the global re-action we saw last February, the consensus is that the selling can be quarantined to China. It is a "closed market" and there should not be any spillover affect. This morning we also had our normal round of M&A news. This is a very light week from a news perspective. The economic releases are minor and there are only a handful of mid-cap earnings releases. We are past end-of-the-month fund buying and we are two weeks away from option expiration. This all adds up to a quiet week. With that in mind, I believe there will be an afternoon reaction to the Chinese decline. Our market has rallied to new highs and I believe this event will generate a round of profit taking. I'm not looking for a major, sustained decline. However, I can see a pullback prior to expiration week. I still like owning energy stock calls and I am long a handful of calls in the heavy equipment group. I am treading cautiously and I would like to add on a pullback.

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