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.