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.