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".