Trading Range Time
14th February 2010
We had weak confirmation that the correction is complete this week as stocks moved higher off of last Friday’s Hammer Candlestick. While the weekly chart formed a Bullish Engulfing pattern, it did so on weak volume. The financial market looks confused, not knowing if it wants to go up or go down. My thoughts are that we will probably ride this bounce back up to the 50 day MA on the major averages before heading south again to find support at the 200 day MA. To put it another way, I expect the market to stay in a trading range between the 200 day MA and the 50 day MA for a while.
There are many ways to trade in this environment, including the Iron Condor. By selling an option spread above and below the current market, you would profit if stocks continue in their current trading range.
For those of you more interested in investing in the stock market this correction has provided a good opportunity to buy in at lower prices. One way to use options to invest in a market that is rising slowly is with the Bull Call Diagonal Spread. For example, with Technology stocks showing strong relative strength lately, you could buy the June QQQQ 43 Call and sell the March QQQQ 45 Call. That should leave you in good shape as long as the QQQQ stay in its trading range, and set you up to profit at a lower cost of entry should the QQQQ break through its 50 day MA after March expiration.
JD
March 23rd, 2010 at 8:16 am
The market proved to be stronger than I thought it would be. The sold March QQQQ 45 call options were well into the money, so you had to take action last week. There were a couple of ways to handle that, sell the entire spread for a profit, or roll out longer in time and strike price by selling the April 48 QQQQ call options.