Market SOLD OFF - What to DO Next ?

Today: October 24th, 2008

My prediction on breakout possibility yesterday was happen today. Following global recession fears and Asian & European stock market slid, SPY sold off by 5.50 points on market open. The VIX jumped to high level of 80, showing signs of market biggest fear.
There is support on SPY 85 (see above chart) and market rebound a bit. If this support line is breached, I assume market will go a free fall.

So, what to do next for an Options Writer? This market is unforgiven so you need to be patient. I will not dare to go long as a contrarian (as usual), but will wait market to rebound. If that is so, a decending triangle is formed. It is wise to go short when market rebound approaching the resistance line (SPY 97/98), however, you just need to be patient.

Options Writer - Wait for a Breakout

Today 23/10/2008

I just want to give a brief comment about Writing Options on Volatile market. If you read my last article, you must be very careful to be an Options Writer on this market condition. Yes, you may get very rich premium, however, the volatility index (VIX) is so high currently on the 70 level. Anything can happen, i.e big rallying on good news and sell off on bad news. This is always happen on Bear Market, very strong move on either side.

Looking at one hour chart, the market is consolidating. A triangle is formed by higher low and lower high. Buyers and sellers are consolidating, and this can bring a potential breakout when it is approaching 2/3 of the triangle.
So, I suggest to wait and see a breakout before you put any position. The breakout can be upward or downward, regardless of bearmarket condition.

Use PUT OPTIONS to get GOOD Bargain on Buying Stock

The Dow made its third 300-point swing of the week Thursday. This time it finished near its worst point of the session after trending lower throughout the day. The two days previous reversal was not supported by public confidence on the impact of $700 billion bailout plan, amid the dismal jobless claim for the week ending 27 September, increased 1,000 to 497,000, exceeding the 475,000 claims that were expected.

Now the question is do we on the bottom yet? Do you wish to buy your favorite/good stock, but you are afraid to do so because of current volatility that might push the stock price even lower again? But, on the other side, the market has big possibility to rallying at any time once House of Representative approve the bailout plan and you will feel miss the train.....

Well, to buy stock even at larger bargain, you can SELL PUT OPTIONS. This options strategy is very simple, yet provide us with lower break-even to get our favorite stock. Sell Put is a synthetic of Covered Call, however, we use differently on different situation.

Say APPL (Apple Corp)is currently at 100.10 on yesterday closing (Thursday). The stock has been depressed lately because analyst lowering the stock grades in anticipation of lower earnings due to lower demand on products. Well, traders and analyst has different opinion. Traders just buy low and sell high. The price of APPL can be a bargain for us since the company is a rich cash company with great product and innovation.

If we look at 95 PUT, we can sell options with premium of 11.05 (1 lot)for November expiration (49days). The huge premium is due to high stock volatility - 101%. If you SELL PUT OPTIONS, your account will be credited by $1,105. If the stock does not go beyond 95 on the expiration date, the premium is yours. Therefore, if you believe that current stock position is on the lowest capitulation, why not SELL PUT?

If the stock goes beyond 95 on the expiration, you will be assigned 1 lot (100 shares) with the price of 95 per unit. However, you have receive in advance 11.05 so the net stock price that you buy is 83.95. I still remember that when APPL on the high of 180, and people still chased the stock as they believed it would hit 200 very easily.

The analogy is like this.... I went to a department store and I like Apple computer and wish to buy one. The price is $1,200 (stock price). Then, I bargain again to $1,000 (strike price, for 49 days). While the store owner is still considering my proposition, I walked out from the store with $132 advance payment (since I put commitment to buy at $1,000). The advance payment will be mine whether he agrees or not on my proposition. If he agreed on my bargain price, my net Apple computer price will be $868 ($1,000-$132).

If you love the merchandise, why not using PUT OPTIONS to get good bargain on buying your favorite stock? Consider this while it is not too late......

Options Trading Opportunity in Volatile Market

For some people, volatile market is very scary and they tend to run away. However, there are quite a number of them also believe that there are huge opportunities to trade in a volatile market. For me, it all depends on your believe and conviction. If you see this situation is an opportunity to trade, you will get it. But don't forget that you must have trading methodology, money management, and discipline, otherwise you plunge yourself on gambling trading situation.

Below are the situations that create opportunity in Options Trading:

- Market is very Liquid.
I like to trade on liquid market. On current volatile market, the liquidity is there and spread bid/ask is on penny. Therefore, it allows me to get in and out easily and reduce my slippage.
- The volatility is high.
When volatility is very low, we only see dry paint picture on our screen. This current volatility provides excitement on trading. When volatility is very high and everybody is scared, to be a contrarian, I always want to be an insurance provider.
- When market is on choppy trading, there is tendency price spike one to the other very wide. You can take your safely spot (strike price) and put a limit order (with acceptable risk/reward). Be patient and market will consequently grab you. So, you will be a liquidity provider to the market.

This is a one lifetime opportunity to see volatile market like this. If you can survive trading on this market, you will be a better trader tomorrow. Therefore, dare to step in is the course of action that you need to do. Only watching on the sidelines does not do any good. You just see things are moving back and forth which does not mean anything.

Options Trading - in Volatile Market (part 2)

One of forum member commented that he could not get filled when he wanted to close his position. He was very upset since he got quite a big loss since he could not cover his position fast.

Later, I found that he traded stock that trade very thinly. During volatile market like this, it is very important to find stocks that very liquid. If you used to trade with volume stock above 1 million shares, you have to seek stock with volume more than 3 million shares. Liquidity is one main important keys on options trading in volatile market. You have to ensure that bid-ask very tight so you avoid any slippage. Bigger spread means you reduce your profitability and this will not make you around very long to trade on this situation.

So, consider this advise, look for LIQUIDITY with the underlying assets that you trade, especially on this bear market/volatile market.

OPTIONS TRADING IN VOLATILE MARKET

Options trading in Volatile market can be frustrating, especially when you are a premium seller. Market can easily go one to another way very fast. There were several Forum readers asked me how I trade in a volatile market. Well, there are some advise from me:

1. Trade small
Do not trade more than you can afford. It is easy to say but sometimes it is very difficult to apply. It needs self discipline not too greedy when you look for opportunities. Beginner always see profits first and risks second. This pitfall can really make a hard hit to your account. There are 3 things can happen: you will act slower to cut your loss, your mind is not clear as usual, and your account can be easily wiped out.

2. Do “Guerilla” Battle with the Market
In volatile market, it is good not to chase a rally or a sell off to sell premium (as an Options Writer). This is due to big slippage on a wider bid and ask. You also do not know when the rallying/sell off will be ended. Therefore, people usually buy top and sell bottom, a contradiction of basic trading rules. I used to put my position in a such way with price that I want. I let the market get it, instead of chasing it.

3. To be a Contrarian
To be a contrarian in a volatile market sometimes is very difficult. It needs trading experience and expertise on chart reading. However, this is where that professional traders usually do. When market sell off and go to low capitulation, people are buying insurance (Buy Put Options). Therefore, volatility is increasing and options premium pushed up. If I convince a strong support line and it is on a very low capitulation, I will sell Naked Put or Put Spread. If I like the stock, selling a naked put is a synthetic of Covered Call Writing. However, if I want a define risk with positive time decay, I will write Put Spread instead.

4. Loose a bit of your Stop Loss
Well, it is also a contrarian belief that you must loose your stop loss during volatile market. Stock trader will tighthen their stop loss, but I as options trader will loose my stop loss. This is because when market has big move, sometimes your short position will be threaten temporarily and market will come back again. Since I trade small with defined risks, I can play with this strategy properly psychological burden.

5. Expect more Return to your Position
When you trade small on volatile market, you can expect more return on your position. Sometimes I can double my return with probability of win almost 70%. Well, it is still a good bet. By doing so, your position can provide you with a yield as the same as when you trade big when market is not volatile.

Well, I hope this can provide you some information how I trade Options on a Volatile market.

Happy Trading…..

Options Trading: Can You Trust The Rally ???

Wow….. last week I wrote beware to pick any bottom, and now the market has been rallying for 3 consecutive days. Positive earnings from leading companies and plunged oil price boosted the rally. Now the interesting question is: “Is it a true rally?

I still believe it is a minor rally. We are in the Bear Market and it needs time to heal the economic conditions, particularly the subprime mortgage turmoil. My technical indicator shows a nice upward move, a consistent higher high and higher low trend at SPY. If the market breaks SPY 130 and passes 50EMA, I expect market will be getting stronger. Otherwise, it will fluctuate around SPY 125 – SPY 130.
Pick your trade carefully and do with good money management. Indeed, you can use the minor bullish trend to take some profit, but remember, use tighter stop if market reverse back down. On this situation, beware to put position against the trend (bullish). If oil price keeps going down, I expect the rally will persist.

Options Strategy: Don’t Pick Any Bottom…

If you follow what I advised last month (June 23, 2008), I hope you are ok with all of your options position (I was on cash position when market heavily sold off). The market was sold-off due to high and fluctuated energy price (broke USD 147 and is assumed to reached USD 150-155 in July) and many problems and issue on the financial market due to sub-prime mortgage.

The largest mortgage creditor Fannie Mae and Freddie Mac traded lower and lower this week and government need to rescue both of them from further catastrophic conditions. In an unprecedented move, the government stated that they would go as far as buying equity on both agencies. This helped to calm the fears and market jumped higher on the open. However, on the late trading day, the selling pressure was still there and made market slipped again on higher low.

For Options trader, be-aware of picking any bottom. We as a trader usually got a contrarian opinion about market. When the market sell-off, it is opportunity to go long and when market rallying, it is opportunity to go short. However, we have to remember that we are currently on the Bear market and we are still on the bottoming process. The banking industry coupled with high fuel prices made everything difficult for a reversal. Therefore, you need to be more patient.

My advise is to trade small, preserve your hard earning capital and always wait for technical confirmation for an entry.

I see that VIX has been pushed up to 28.48 today. This means that VIX has jumped almost 30% since I wrote my last blog. It is an opportunity for options seller to get richer premium, but you can be always wiped out by the volatility of the underlying assets. Therefore, control and manage your position tightly and always do what options sellers/writers do for strategy: define your risks, positive theta for time decay, and a flat delta.

OPTIONS Trading…. Step aside and wait for a Reversal

I wrote to my forum (http://options.forum2u.org/) about 10 days ago and recommended readers to cover long position (Options Spread – Bull Put) since SPY would break down SPY 135, which was the support line. My argumentation was the fluctuation of Oil price during the past weeks and SPY experienced lower high and lower low on technical indicator.

On my surprise, the VIX did not get higher despite the downturn and writing options was not my strategy on this situation. It was very hard for me to find acceptable risk-reward on writing options since market was fluctuated but the VIX was low. Since the implied volatility/options premium that market maker priced did not corresponding with the actual situation….. so it was time for me to step aside (I converted most of my position to cash).

Up to this writing, the index has been depressed for 4 days in a row. It was really bearish condition and it could reach the lowest point SPY 126 like in November 2007. My advise is don’t take any bottom before a good technical indicator confirmation. To know this, I would look at multiple time frames graph and ensure there is no conflict one to the other. I also usually look for good stocks that depressed obecause of negative news and fears surround the whole situation. If the VIX is not so high, buying long term Options with deep in the money can be a choice (this will show you that an Options Writer can also do straight Buy Options to leverage profit).

Time to go for GOLF and COLLECT your OPTIONS Premium

It has been quite sometime I have not updated my blog. Do you know why……? Well, I’m too busy to do other things and not concentrate on market movement. One of my friend asked me how can I trade Options without looking at my position closely? I told him that no matter where market moved, my position was safe and I collect premium options everyday. Even… I collected options premium during my sleep and weekends !

Current market movement is on “Trading Ranges”, means it is going up and down on a range bound by strong resistance and support line. This condition is really heaven for traders who have style “Market Neutral” and/or “Write Options” on their portfolio. After wild movement on the past months, market is on consolidation phase. A relatively good news or bad news usually made the market went up and down a bit, and no wild volatility.

VIX or volatility index on the S&P is relatively low, ranging from 18-20. I believe the VIX will be on this range for about couple of months. This means, I still can relax and get the money every month without concentrating to the market.

My friend asked me: “how do you that? Well, it is easy if you know the methodology. On Market Trading Range movement, I did not go for bullish nor bearish. I have many combinations of Vertical Spreads, Iron Condor, Calendar Spread, Unbalanced Butterfly and even Sell Put if I like the stock. I aligned the “Delta” position as neutral as possible so that market movement did not hamper my profit and loss position. Since the VIX is low, the entry point must be precise, means I will sell / write options if VIX is on increasing trend to get “rich premium” on that spot. If the VIX went down, the options that I sold were certainly profitable already.

If the VIX is very low, I went for spread positions that help me/ increase in value when volatility is increasing. By doing this, I hedge myself no matter volatility is increasing or decreasing.

Other most important thing that I have to do is to watch the overall portfolio. I need to adjust properly if my “Delta” is far too positive or negative. This is what I call “Risk Assessment” toward a portfolio where every professional trader must understand this. Ok, I hope you can take profit out of the market on this trading range market and I will continue my other activities…..

BULLISH SIGN (short) in mid of BEAR MARKET ?

please click picture to make larger...

This article is a continuation of what I wrote two weeks ago about SPY (spider). As we know that S&P 500 is the pulse of overall market direction/condition, it is worth to see its price action. For the consistency of analysis, I also used two past weeks data. Despite price broke down from the rising wedge (see April 9,2008 article), price was able to rally again to SPY 139 due to good 1^st Q earnings from leading companies. 30 dma has more conviction on the upward move. Despite it is still a process to cross the 50 dma, but the angle upward movement was getting steeper. Double bottom presence was replaced by the forming reverse Head and Shoulder pattern. Once the price have technical break out of SPY 140, we will have more conviction on this sign.

I still believe SPY 140 is still a strong resistance line. However, price has tested 200 dma and this made this resistance line getting weaker and weaker. SPY 145 will be the next resistance point should price break out SPY 140. It would be hard to surpass this line since we are still on Bear Market and market needs more time to recover.

For Neutral Options Player, watch out for the break-out SPY 140. You may reduce the short (bearish) position should technical show this conviction. I will be more comfortable having neutral to bullish sentiment on this short time period. But......always look for price action..... (as quoted by Brian Shannon).

A Heaven for Market Neutral Options Players?

click for a larger picture...

“I was quite doubt that market will surpass SPY 140 level in the short time as subprime mortgage problem is still big…..” That was my comment in an article that I wrote on March 25, 2008.

The followings are what I see from the technical point of view now:

Despite many bad news on the market (i.e. recession slashed 80,000 jobs in March and national unemployment rate increased from 4.8% to 5.1%), SPY broke 50 dma after passing 30 dma.

30 dma has an upward movement and may crossing 50 dma. It is still a process and once it is happen, market will have more conviction on the move.

There was a presence of a rising wedge (triangle). Prices edged steadily higher in a converging pattern. The inability of prices to accelerate on the upside despite continued probes into new high ground suggests the existence of strong scale-up selling pressures – due to many bad news coming into the market.

There was a presence of forming double bottom. Despite it was not a strong indication market will move higher, the process had been taken months.

SPY 140 will still be a strong resistance point. If market gets a technical break out of this level, it will test the 200 dma and will reach SPY 145.

Any bad news from earnings this week will initiate pressure to the market and a sell signal may occurs when prices break below the wedge line.

Nevertheless, the bottoming process has been made and Fed will do everything to save the market. Therefore, I will not see that market will be easily drop to SPY 132 (the crossing of dma 30 and dma 50) or even the strong support line of SPY 125.

VIX (Volatility Index) is on decreasing trend to a low of 22.36.

Knowing that market is on a trading ranges, it can be an ideal situation for Market Neutral Options players. Iron Condor with high probability (i.e. 80%) can provide you with consistent income strategy. Be careful on market rally once it has a technical break out of SPY 140.

SPY Market Overview and Options Selling Opportunities

note: click the graph for a bigger picture

Do you believe the recent rally will continue? Well, it is a tough question and everybody can only guess. The Fed cut the interest by 0.75% last week and quickly saved Bear & Sterns from deep trouble by merging the company with JP Morgan.

The collapse of venerable firm Bear Stearns has been dazzling. The company was supposed to be worth a bare minimum of $80 per share. It turns out to have been worth one-fortieth of that -- a catastrophe for its employees, whose fortunes lay largely in Bear's stock (a super-good lesson in diversification for everyone).

The $2/share bid price was very ridiculous and unreasonable, made many investors/shareholders irritated. A week before the company collapsed, the CEO ensured to shareholders that everything was in course, and many of them stayed and even add exposures to the company. This negative reaction can dampen down the market further, so Fed took critical steps by increasing the bid price higher to $10/share (the Fed bailed out Bern & Sterns at the amount of approximately $29 bio using tax payer money...). This action made the market rallied on Monday and Tuesday……

SPY passed the 30 dma and tested 50 dma. The downtrend line showed resistance point around SPY 135. If the market can passed this downtrend line resistance, it would be tested again on SPY 140. I was quite in doubt that market will surpass 140 level in the short time as subprime mortgage problem is still big. We still do not know which financial institution would be in trouble following Bear & Sterns. Currently, the Fed was making huge steps on saving the market, but only for short term approach. It was just like putting band aid on huge wound…..

If you look at the chart, there was trading ranges around a strong support line of SPY 125/126 and a resistance line of SPY 140. I am expecting choppy price action for the following weeks/months. Looking at this situation, what are the opportunities for Writing Options? Well……any rally to SPY 140, there is opportunity to Sell Credit Call Spread, and any decline to SPY 125, there is opportunity to Sell Credit Put Spread. However, be careful with strong false rally that usually happen for a short period of time due to good news that disseminated by analysts…..

OPTION MONEY MANAGEMENT – LIKE SEX???

“Money management is like sex: Everyone does it,one way or another, but not many like to talk about it and some do it better than others. But there’s a big difference: Sex sites on the Web proliferate, while sites devoted to the art and science of money management are somewhat difficult to find…..” written by Gibbons Burke.

Yes, Gibbons is right….money management is a rare commodity especially on Options courses. “Get Rich Quick” is the strong password to sell Options Course for many speakers/seminars. They put pictures of ex-students and commented that Mr. A- had been profiting more than 1000% in in GOOG Options trading…. When I looked at this advertisement… “yes”, it happen on paper trading and it was only occurred one time, not everytime…….

Money management in Options is indeed very important. Yet, it is very difficult to execute it if you overtrade and do not trade based on your level or expertise. On one occasion, I had been on one single big trade and using more than 50% of my fund margin (note: it is only a foolish who uses 50% margin fund for one position). I was so “Greed” and saw only profit potential and did not see the catastrophic possibility. I was so sure that the stock would not move down passed the strong support level that I believed in. This was due to that the stock had been lowered on an extended period of time and experienced exhaustion. Well, there was one important lesson here that during a Bearish Market, anything can be happen…. and the stock really against toward my position…..

Since I was over-trade, cutting loss means huge pain. Therefore, I fixed the position by rolling my position to next month, putting to more conservative strike price and expecting time will help to recover the loss.

My expectation was half true. I was right that the stock crept up again.. but only for certain period of time and began to be pressured by whole discouraging market conditions. When the stock rebound, I actually could make a good stop loss, nevertheless, over-trade made me hesitate to do that…….

A week later, the stock showed further deterioration and luckily, I could be able to discipline myself to get out from this trade and ate my loss (around 40% from the margin and I really did not like the whole technical indicators). The prediction was right, the stock plunged more than 20% to the lowest level for over 2-3 years. Should I waited again, I could loss the whole margin……

The thing that I want to share to you is that “over-trade” can definitely make you stunned on executing important move. I experienced that I can cut loss earlier when I did not over trade. It was really easy and no emotional involvement. I can also close my profitable positions earlier (if I have more than 80% of profit and options expiration is still more than 2 weeks) and look for another options trading opportunities. Not to over-trade is one important step to Money Management.

Gibbons Burke wrote an interesting article about “Money Management”. The article discussed about:

• Money Management Task
  
• Determining per Trade Risk
• It is more than Stops
• OverTrading and UnderTrading
• Understanding Trading Risk
• Tools for understanding and practicing money management
• 






….for those of you who are interested to read the article (in PDF format), please send me an email to kxdhar@yahoo.com and posted “Article Intrested”. I will send you the download link.

Faith, hope and prayer should be reserved for God …. the markets are false and fickle idols.

GUIDE TO SWING TRADING - A BONUS FOR WRITE-OPTIONS READER

LEARNING OPTIONS without knowing to where the STOCK will move? Big Mistake.....
Options is a Derivative Product and an Investor/Trader has to know Technical Analysis to have an edge.

If you want to know:

- Why Technical Analysis Work?
- Japanese Candle Sticks.
- Moving Averages
- Force Index/Directional Moving Index
- What is Swing Trading
- The Steps in Swing Trading
- What Can You Expect?
- Identifying Stocks that Appropriate for Swing Trading
- Taking Profit and Preserving Capital
- How to Enter The Trade
- When to Enter the Trade

And More.........

You can DOWNLOAD THE E-BOOK.... for FREE !!! (Please acknowledge your Friends if they are interested).

The E-Book will tell you about Swing Trading, but I believe you can learn the Technical Analysis discussion to anticipate to where stock will move.

Happy Reading.....

BUY OPTIONS ? Read this Article before you DO it…..

Options has attracted many investors because the “LEVERAGE” factor. By buying Options, investor will have ‘LIMITED” Risks and “UNLIMITED” Return. This means that you can pay a certain amount of premium (depending on the volatility) to get Unlimited Return when the stock/underlying assets is moving based on your expectation….. Good, isn’t it?

Well, hold your conclusions for a while and be CAREFUL on Buying Options...... the followings are the points that you MUST consider:

1. Options is a wasted Asset.

Every assets are subject to be depreciated, based on the their categories. Indeed, there is asset that can not depreciated such as land. Every Options contract has tenor, and options value will be substantially reduced approaching the expiration date of the contract. This is what we call it “Time Decay” factor. I am really reluctant to buy Options that have high “Theta”, which is Time Decay is very fast. Many Options seminars teach students either to Buy Call or Put Options to cultivate gapping event of certain stocks before earning announcement. Some of them even suggest to make “STRADDLE” position, where you have to buy Call and Put options with the same strike price in anticipation you can hit the big bucks no matter the stock will gap up or down. Nevertheless, they never talk about suggested options tenor that must be bought. As I said, on one month options tenor, Theta is very high and Time Decay is against to all Options buyer. By buying Straddle without knowing momentum and volatility, it is a recipe of loosing the trade.

2. Even the STOCK is running to your direction, the OPTIONS value does not Move……

Many investors do not know why the options value do not move as their expectation despite the stock is moving onto their direction. Options is a derivative product and it is quite complex. The options value is calculated based on “Theoretical Options Value” (such as Black Scholes, Binominial model) and there are many factors affect the value… such as interest, tenor, strike price, dividend, etc. So, before buying options, you have to know “Delta” or the degree of change in option premium in relation to changes in the underlying stock. Many investors want to buy cheap options with the expectation of having Unlimited Return. Well, this is definitely wrong. By choosing OTM (Out of the Money) strike price, you will have higher breakeven (in case of buying call option), therefore, the stock must increase higher than your expectation.

The OTM Call Options usually have lower delta less than .50, and this means your option value will increase very slow compare to stock increase.

3. Even the Stock is running to your direction, your still loose the trade -> the “TIMING” is wrong…

Many Option buyers want to cultivate momentum when stock is gapped up or downward and they buy one-month options since it is cheaper to do that. This is what usually a seminar teach people to see which stock candidate that will bouncing up or down after earning announcement. Well, it may be right that due to good earning result, stock is increasing and running to their direction. But most of the time, the timing is wrong, means the stock is running/rallying after the option is expired. The direction bet is right, but the timing is wrong, and this is happening again and again….

4. You buy Pricey Options….

Every trader must do buy low - sell high. This is also work for Options trading. Options buyers bet options value to increase substantially. But, some investors buy options not considering options price when they buy options, but only looking for momentum that they think can push the price higher. When earning announcement is still pending and nobody know the company’s result, “greed and fear” are influencing the market and usually this drive higher implied volatility and consequently the options price. Nevertheless, when the momentum is decreasing (or no great news anymore), usually volatility is down and also the options price. For option buyers who is using momentum to bet, they usually loosing the trade when volatility goes down.

WRITING CALL OPTIONS TO BALANCE YOUR LOSS AND WRITING VERTICAL SPREADS TO PROFITING FROM CONSOLIDATING MARKET

Bernanke made a bold move by cutting 75 basis point interest rate the day after the Martin Luther King’s Holiday (Jan 22, 2008). It was a shock therapy from him after future market went down substantially and the overall gloomy market outlook. SPY gapped down from above 130 to below around 126, the lowest low of the year. Many investors cringed as they just could only watch their 2007 investment return was washed out just in a blink.

The shaken of US market made big tidal wave to other countries as well. Europe and Asian market got the negative affect and made all investors in the world wondering what they had to do on this situation.

Before the FOMC meeting on 30 Jan 08, market also dictated Bernanke to make a further interest rate cut by 50 basis point instead of 25 basis point. I personally believed that if Bernanke only cut 25 basis point, the previous cut that he just made (75 basis point) will mean nothing to the market. Market really jitters on the whole condition and need assurance and commitment from the Fed and US government on the next move.

The last trading action on Friday closing (feb 1^st), little positive breeze felt already as all indices went up. SPY surged and closed at 138.00. Before the approved stimulus financial package really implemented, I may predict that the SPY index will move sideways around the channel trend that I drew previously (see graph). Strong resistance at 137/138 was got from low point in mid August 2007 and support trending sideway-trending lines since October 2007.

I was questioned by one of forum member about what to do if he owns stocks that he perceives good stock and he wants to hold them for long term investment. I suggested to him to Write Call Options against his stocks. By Writing a Call Options, he will get the premium and reduce his loss when the market gapped down.

I also told him to write the CALL OTM (Out of the Money) if the stock has positive relative strength to index (on historical point of view) and stock will move upward within short period of time. By writing on OTM strike price, he will get double return from price increase and premium sold.

For those stock that he wants to sell, I suggested not to Write Call Options deep ITM (In The Money). To do this, he must choose the Strike Price that produce High Time Value. By Writing ITM, there will be big possibility that the stock will be exercised and provide a downturn cushion.

When the market is consolidating and volatility went down to normal from current high (market moves sideways), Options Investors can reap profit by selling Vertical Spreads. This is one of my favorite strategies to have consistent return. For stocks that good Relative Strength, you may write Vertical Put Credit Spreads, and look for good support line. For stocks that have negative Relative Strength, you may write Vertical Call Credit Spreads and look for good resistance point. If you believe that the stocks will move on close and tight trending lines, you can use Iron Condor that have friendly margin. The probabilities and choices will be many if you use your imagination and creativity.

STOCKS…HOW LOW CAN YOU GO…? CREATING OPPORTUNITY FOR OPTIONS PLAYERS…?

How Low Can You Go? This is one of the tag sentence of the most well known cigarette brand in Indonesia “Sampoerna Light” which was acquired by Altria Group/Phillip Morris (MO) a couple years ago. The questions of “How Low Can You Go” has the perception of how low the Tar and Nicotine content comparing to other rival cigarette products.

This tag reminds me to the current market condition. On the S&P daily chart, we can see that stocks were trading on the “Trading Range” , started with the high of 157.52. This is like a neutral zone in the ongoing battle between buyers and sellers. If the trading range is in uptrend, the buying army is obviously stronger than the selling side and rising prices result. The trading range that we have since mid of October 2007 is a downtrend, the flip side of the coin and the selling side is much more powerful than the buyers. So, there a couple of higher-lows and lower lows that make “BEARISH” message on the technical side.

There was a break-out on the 138, and a support level on the 137 the lowest level in August 2007, but once again, Sellers were dominance on the process and stocks were just falling down like a knife without any stops. 30 MA confirmed the downtrend since the beginning of November 2007. This is very ugly scenario and there were a lot of damage happen. The good news of IBM and GE Earnings that exceed analyst expectation just made small rallies, but the bad news on the whole recession possibility really caught investors tightly.

Investors need more assurance from Fed and US Government on real Solutions. It must be fast and comprehensive, otherwise the situations are getting worse. The Bush administration propose “Financial Stimulus” yesterday and some of key actions are:

- Tax incentives to Businesses

- Financial Stimulus of 1% of the GNP, or approximately $ 145 billion.

On the upcoming Fed’s meeting on 29-30 Jan 2008, interest will be cut by 0.5 basis point. I do not know whether this will be helping on the overall economic situation, but, the previous 0.25% reduction has not made the market move and the decision was below market expectations (see my writing on “Market Bullied Bernanke”). With the existing increasing of inflation threats, the Fed must be very careful on every steps that they made.

The down rally was getting worst by the options expiration week. Options buyers usually sell their ITM positions in order not to be assigned and market maker has to buy it. To hedge this position, market maker will sell shares and weighing additional pressures in the market.

I still do not see the “Bottom” yet despite market has been dropped so much. All of technical indicators are still showing downtrend. However, I believe there are quite a number bargain hunters are waiting for short rally, especially after Fed Meeting and Financial Stimulus.

To buy Call Options making a bet on good stocks that have been on their lows can be rewarding, just make sure the tenor is about 3 months to ensure the right movement. However, you must consider that you may pay premium price due to high volatility. Selling Put Credit Spread with far OTM strike price on good stocks that has found firm support is one of my favorite strategy. Just imagine, that market players need insurance and you sell the insurance to them with high price. However, this will be a good move if you choose good risk on good stock that quite robust with Bearish situation. There is always opportunity in a bad market condition and this is how you you look at it…….

PLAN YOUR TRADE AND TRADE WITH YOUR PLAN

One way to be consistently profitable at Options Trading is that you have to Plan Your Trade in advance. This is very simple steps but crucial... where traders often forget to do it once they see opportunities to make money in the market. Sometimes "the allure of putting a position" is very big and we easily forget the discipline.

Below is "The Approach- One Way" from Pete Stolcer, one of most well known Options Trader. He is running 1option.com and also provide advise of stocks and options at his blog. I hope that his approach can help you to be a better trader:


1. First, form an overall market opinion for the next 30 days. Use technical and fundamental analysis to support your conclusions.
2. Get an early read on the market by viewing the Pre-Open searches in the Scanner. They will identify stocks that will be up/down right on the open. Identify groups that will be on the move and analyze the news to determine the driving market forces for the day. Look at the prior day's movers to refresh your memory.
3. In the first 30 minutes of trading, review the Movers searches in the Scanner. Identify areas of relative strength/weakness within the market. Form a market opinion for the day and determine intraday support/resistance levels.
4. Narrow the universe of stocks. The searches have eliminated the vast majority of stocks using sophisticated programs. You will see stocks that conform to a particular price pattern and they are poised to move.
5. Select the stock lists in the Scanner and quickly "flip" through hundreds of charts. Visually identify attractive candidates. This process is all about pattern recognition and it is explained in the Tutorials. Understand the concept and gain one of the most powerful trading skills.
6. Use the one-month and one-year charts to further reduce your list to a handful of candidates. If the one-week chart looks good, zoom-out and look at the one-month chart. If that looks good, zoom-out and look at the one-year chart.
7. Review the news. What's driving the stock? Avoid trading "hot" news. There is too much "noise" and the stock needs to digest the event. By all means do not initiate a position before earnings are released. Identify long term guidance revisions up or down by the company. That is valuable trade information.
8. Look at the financials. Is the company making money? Are the profit margins improving? Do they have cash so that they can increase dividends and buybacks? Are they a "pipe dream"? What is the overall state of the business?
9. If your answers to the above questions warrant it - develop a game plan. Identify support and resistance levels and know when you are getting in and out.
10. Form an opinion on the direction, magnitude and duration of the expected move.
11. Consider your overall confidence level in the trade and "size" your position accordingly. Your market opinion also needs to be factored in here. If your market opinion is neutral try to balance long and short positions.
12. Characterize the options markets in terms of implied volatilities and liquidity. Are the options expensive? Are the bid/ask spreads wide? Is there any volume or open interest?
13. If appropriate identify an option strategy.
14. Try to carry a balance of bullish and bearish positions where you are long relative strength and short relative weakness. This portfolio can be weighted toward a bias but there should always be a mix. This will help reduce "market risk".