Stock Option Trading Strategy – Look for shorting opportunities on weak stocks that bounced big.

September 19, 2007
Author: Peter Stolcers, Founder of OneOption

In a rare move, the Fed surprised the market with a half point cut in interest rates. There was a 30% chance of that happening factored and to bond prices, however it was definitely not expected. The half point cut was exactly what the market wanted. The S&P 500 futures jumped 20 points higher on the release and added to the gains right into the bell. Overseas markets rallied anywhere from 2 ½ % percent to 3 ½ %. This morning, the CPI came in at expectations and the impetus from yesterday carried us higher right from the open. There was a great deal of short covering that fueled the market higher and some of the biggest gainers were stocks that have been beaten down. Personally, I was shocked by the move. As you know, I have been in the camp that feels global growth will carry us through this soft patch. I felt that the Fed was forced to lower by .25% because it is what the market expected. The fact that the Fed lowered interest rates and the discount window by a half point tells me that they see trouble ahead. They have been interviewing industry leaders to get a read on the future and they are concerned. Quadruple witching has a bias is to the upside. Option expiration related programs will only happened if the market establishes a pattern where it grinds higher. I don't see that happening today. We have seen the initial rally stall and then we saw a rally fade quickly after it got started. Once the euphoria wears off, I feel that the market is vulnerable. We are currently within striking distance of a new all-time high on the SPY. The next few points will be hard fought. Tomorrow I see a mixed bag of earnings. GS is likely to beat and BSC is likely to post a weak number. FDX is expected to release soft results and if their guidance is weak, the reality of a slowing economy could set in. At this juncture I am more inclined to short stocks that have bounced from a short covering rally. I would stay away from the financials because earnings will be released tomorrow. Look to some of the retail names and tech stocks. I believe the highs for today are in. Those of you that took advantage of my "Special Report" (paid subscription to the Daily Report) have some very nice profits. The SPY surged above 151 right after the announcement and your buy orders were triggered way before the stocks could respond. If you did not use a conditional order as I instructed, you missed a big chunk of the move and you wasted valuable time entering orders. I told you this would be a fun event. The key is to do your homework and have a game plan. image

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