Stock Option Trading Strategy – Bull Put Spreads

April 23, 2007
Author: Peter Stolcers, Founder of OneOption

Last week I pointed out that the Fed is likely to keep their present policy intact the rest of the year. Consequently, I feel the economic releases will produce temporary knee jerk reactions for the next few weeks and nothing more. The domestic economic growth is moderate and so is the rate of inflation. In 2007, the economic numbers have covered the spectrum. One week the economy looks weak and inflation is high, the next week the economy is strong and inflation is low. All of the other possible combinations have been covered as well and my conclusion stands – moderate growth, moderate inflation. I’m not expecting a big reaction, but Durable Goods, the Employment Cost Index and GDP will be the numbers to watch. I expect moderate growth in both the economy and unit labor costs. Now that I’ve covered interest rates, let’s take a look at the more relevant market force. Earnings had the biggest impact last week and in general, companies have beaten lowered estimates. Friday, a round of very strong earnings helped to create a buy imbalance on the open. Instantly, out-of-the-money options were in-the-money. Traders scrambled to adjust risk and this provided and artificial boost to the market. In general, the major banks posted strong results and cyclical stocks (rail, heavy machinery, steel producers) are benefiting from global economic growth. Tech stocks looked soft but there were pockets of strength. In this week’s chart you can see that tech stocks were not able to make new multi-year highs while the S&P 500 has clearly broken out. Here are some of the earnings that are due out next week. There are too many to list so this is by no means a complete list. I have categorized them chronologically and in terms of my general bias; bullish, neutral or bearish. Don’t trade off of this list without conducting extensive research on your own. Bullish: CME, PH, STTX, LMT, NOC, VLO, ATI, LIFC, WFT, WLP, GD, QCOM, KOMG, SII, TEX, AET, CFC, CMCSA, POT, IR Neutral: ATI, MCO, R, AKAM, AAPL, BIDU, BYD, BG, MMM, HAL, KLAC, SNDK Bearish: PCAR, PNRA, PFCB, TSCO, FFIV, HAR, CMI In general I like energy, defense, healthcare and cyclical stocks. You’ll notice that PCAR and CMI are cyclical stocks that are on the bearish list. I feel that the EPA’s “Clean Air Act” generated advanced sales last year ahead of the new regulations and the next two quarters will be very lean. Long term, the companies are solid. On the bearish list you’ll also see a couple of high P/E restaurants that I feel will be impacted by cold weather and higher gasoline prices. Every group and sector will be represented by the end of the week and we will have a handle on where the earnings growth rate stands. I am still market neutral. Even with the breakout above SPY 146, I’m concerned with the breath of the rally. It will be difficult for the market to make a sustained move if it is not getting full participation. I need to see the market hold the SPY 143 level in May before I can move to a bullish bias. For now, I'm trading bull put spreads on stock I like.

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