Tuesday’s Stock Option Trading Strategy!

December 18, 2007
Author: Peter Stolcers, Founder of OneOption

The is weak and you have two choices - buy puts or sell OTM call credit spreads. Yesterday, prices opened lower and the bulls were not able to generate much of a rally after Friday's decline. By late afternoon, sellers gained confidence and they dominated the activity as the market closed near its low of the day. During the decline, a key support level at SPY 146 was breached. Overnight, the European Central Bank allotted $500 billion to banks in a radical move to add liquidity. This took the coordinated action announced by five central banks last week to a new level. This news provided a positive backdrop for the market and the S&P 500 futures were up 14 points in pre-open trading. This morning, Goldman Sachs released its earnings. It beat estimates, but the performance in November tailed off substantially. As I mentioned yesterday, this release had a high probability of producing a negative impact on the market. GS is down $10 and the financial stocks are heading lower. The momentum has clearly shifted to the downside and if traders sense that a steady decline is in the cards, they will execute sell programs ahead of option expiration. This will accelerate any decline. The reversal today, the multiple support breaches in recent days and the "hot" inflation numbers from last week tell me this market is headed lower. At the end of the week a strong seasonal pattern will present itself. It is known as the "Santa Claus rally". If the sellers view this as an opportunity and they keep a lid on the market, the chance of a substantial decline increases. Foreign markets are also starting to show signs of weakness. There have been astronomical gains in emerging markets and I would not be surprised to see some of that "fluff" come out as profit taking sets in. For today, stay bearish. You can play it relatively safe by selling OTM call spreads. If you want to get aggressive, by puts on cyclical stocks. That includes heavy equipment and some of the commodity stocks. These groups have had exceptional gains and they could get nailed if global economic strength is questioned. image

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