February 7, 2008
**Be sure to read my exclusive interview in the February issue of Stocks and Commodities Magazine!!
It was a rocky session on Wall Street; the March Dow had a range of nearly 250 points leaving many traders with a headache. I wish someone would have warned me, I would have taken Dramamine early this morning. Instead, I along with many others, were subject to the brunt of an extremely choppy and erratic session.
Rumors regarding Tuesday's ISM Services index being miscalculated sparked a short covering rally late in the session. However, the rumors were quickly put to rest...and so was the rally. A triple digit rally in the Dow quickly turned well into negative territory.
It looks as though investors may be finally coming to the realization that there are several values in the stock market. Picking a low is impossible, but finding a bargain isn't. Whether or not the major indices will retest the lows is up for debate, but fresh cash coming into the market could become a reality in the near future. As a trader, I am looking for the Dow to retest 12,000 or even 11,900 to create an opportunity to sell puts. As an investor, long-term (non-leveraged) purchases of the major stock indices seem to be a smart move.
Believe it or not, the Nasdaq looks to have a better technical set up than the Dow. This is likely due to the fact that of all the sectors, tech stocks have been the red headed step children. It takes a lot of guts to fight the trend (and it didn't work out to well for us last time) but I like buying a mini-Nasdaq at 1721 GTC.
Believe it or not, I still remain a long term bull...we are continuously reminded of the bearish obstacles facing this market, but there are still some supportive factors. If you would like additional insight on the markets and what the upcoming year may bring email me at cgarner@alaron.com with your name, address and phone number.
Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.
Dow Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
February 4 - Volatility remains high. This creates opportunities for traders to sell options for premium collection or in conjunction with a spread (combination of long and short options). Similar to the 1 by 2 put spread recommended below, you may be able to do a ratio call write using the 12,800 call and the 13,100 calls. This spread should be executed near even money. This simply means that you will be bringing in as much premium on the short options as you pay out on the long options. The risk is unlimited above 13,400 and will see its maximum profit of $3000 (assuming you are filled at even money) at expiration if the underlying market is trading at 13,100. Keep in mind that this trade pays out something anywhere from 12,800 to 13,400 and has no risk exposure beyond transaction costs and the cost of the spread (if any) below 12,800. Call me for help!!
January 14 - With the volatility up, so is the premium. Based on values seen at the end of the trading day, it is possible to buy a March 12,600 put and sell 2 of the 12,100 puts for a net credit of about $350 to $400 before commissions and fees. I am not a bear here, but this seems like the thing to do. The trade makes money intrinsically from 126 to 116, the max profit on the trade occurs at 121 and is in the amount of $5000 + the premium collected - transaction costs. The only way that this trade loses at expiration is if the market drops below the break even point of just under 116. Of course, the risk is unlimited under 116.
- January 15 - We were getting filled on this trade at a credit of $700
- The market is higher, but that is ok. If the spread expires worthless we get to keep the premium collected.
January 2 - I like the idea of beginning to shop for short put plays. I like the February 12,100 puts for about $1,000 (maybe a bit more). The break even on this trade would be about at about 12,000. In other words, the only way that this trade loses at expiration is if the Dow is trading below 12,000 on February 15th. Of course, the risk is unlimited beneath the break-even point.
Please note: A mini-Nasdaq chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.
Nasdaq Recommendation
Position Trade -
February 7 - Believe it or not, the Nasdaq looks to have a better technical set up than the Dow. This is likely due to the fact that of all the sectors, tech stocks have been the red headed step children. It takes a lot of guts to fight the trend (and it didn't work out to well for us last time) but I like buying a mini-Nasdaq at 1721 GTC.
Carley Garner
Alaron Research Team
800.935.6492
cgarner@alaron.com
http://www.commoditytradingschool.com/
There is substantial risk of loss in trading futures and options.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers, directors, employees and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
