Stock Option Trading Strategy – Sell put credit spreads on commodity stocks or go golfing.

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

When John Vogel, the founder of Vanguard says that in his 50 years of investment experience he can't recall this type of volatility, it means something. He is one of the industry’s innovators and you would think that he has seen it all. Huge day-to-day reversals have become the norm. From a trader's perspective it means one thing – uncertainty. The bulls are very strong in their conviction and they believe that the current decline represents a fantastic buying opportunity. They point to the low unemployment rate, solid earnings growth, global expansion, and relatively low interest rates as signs of strength. Most quantitative models show that stocks are an attractive value. The bears also have a long list of items to substantiate their bias. They point to increasing debt levels across the board (federal, state, municipal, personal) and they believe the credit squeeze is just beginning. From 2000 – 2005, almost 50% of the employment growth came from the housing sector. This number includes lenders, realtors, construction workers... everyone. They believe that the sub prime woes will continue to spread into other areas and the unemployment rate will rise. They also believe that hedge funds are highly leveraged and that the current credit crisis could force another round of liquidation. In a worst case scenario, they believe that some of the “fluff” will be taken out of the emerging market run up. That too could have a cascading affect. Personally, I'm going to stay out of this fight. When a winner emerges I will know how to position myself. In the meantime, the implied volatilities are very high and option selling strategies make sense. This is a way for your to play relative strength and weakness and distance yourself from the action. I currently favor selling put spreads on commodity stocks. A growing global population and finite natural resources tell me that prices will stay high even during a temporary economic slowdown. As for today's action, expect volatility that goes nowhere. In the last week we have been to hell and back. In this light volume environment you should keep your size small and spend most of your time on research. Better yet, spend time on yourself and get in a round of golf. The fall season will be busy. image

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