Friday’s Stock Option Trading Strategy!

Option trading on expiration is tough due to the "noise". Focus on next week's earnings releases and buy call stock options on stocks that have a history of rallying after the news. This dip might provide a nice entry point for those stocks. As I mentioned in yesterday's market commentary, there was a greater chance for earnings disappointments than there was for upside surprises. Overall, the earnings came out quite good. With the exception of financial stocks, most sectors have been beating expectations. That last sentence holds the key. Financials are not some small little part of the overall market. They comprise 20% of the S&P 500. This week was laden with earnings releases from national/regional banks, mortgage lenders and brokerage firms. Next week, we will see a much greater mix of earnings. SLB posted nice earnings and it is down by more than $10. In fact, all of the oil stocks are getting hit hard today. Oil is making a new high and that might become an issue for this market. I still believe that energy is one of the best investments and once this pullback stabilizes it will present a great buying opportunity. I have been telling you in my daily comments to lighten up in this area. CAT posted a 21% increase in earnings; however, they lowered guidance for next quarter. They painted a very weak picture for domestic construction. Earlier this week housing starts fell to a new 14 year low and the beige book indicated weaker economic conditions across the nation. The dollar continues to drift lower and it is making new 30-year lows against most major currencies. This will eventually translate into inflation and that will eventually put upward pressure on interest rates. On a down day in the market, it is easy to focus on the negative issues. I believe we could see continued weakness for the next week or two that tests some of the major support levels. The last few days of October mark the beginning of the strongest bullish seasonal pattern of the year. I believe we will work off the worries and rally into year-end. Corporate earnings have been strong, the unemployment rate is low, interest rates are low, tax rates are low and inflation is in check. All of these conditions might be on the brink of changing; however, I don't believe that they will deteriorate before year-end. I am patiently going to wait for support to be established and then I will buy this dip. I do not want to try and short this market for fear that I will get caught in a whipsaw. I got caught short last March and I learned from my mistake. In August, I bought into the weakness and took profits during the snap back rally. It is expiration Friday and anything can happen. The depth of this decline indicates that there is nervousness and traders might lighten up on long positions going into the weekend. There is a greater chance for the market to close near its low of the day than there is for it to close near the high of the day.

Daily Bulletin Continues...