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.