Here’s how you can profit in a trading range
The short-term market trend is up, and overbought, and the intermediate-term market trend is up. The
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PowerRating) (S&P 100) index traded higher on Wednesday up 2.89 points to the 585.80 level. Financial markets have traded very narrowly the past 3 days with the S&P 100 index closing at the 585.04, 582.91, and 585.80 levels respectively. It is not surprising that stocks have stalled over the last few days given that stocks are overbought, and approaching long-term resistance levels. In looking at the short-term chart below, the XEO index has traded in a range between the 569 and 589 levels for the past 3 months.
From a longer-term perspective, the S&P 100 index has traded in a range between the 543 and 589 levels for over a year. In total, the index is up only 2% since January 1, 2005. While very little has happened in financial markets for over a year, this does not mean that there were not excellent opportunities to profit with options. Options have the unique characteristic of being able to earn profits when the security underlying the options sits still by using the time depreciation characteristic of the options. This means that by selling options, one can profit when financial market conditions are static as they have been in the past year.
Bottom Line: It is likely that financial markets will remain in the trading range set forth in the short-term chart above. This means that traders can look to execute long positions when the S&P 100 index declines to the 569 level, and seek to take profits, or enter short positions when the index rises to the 589 level. Additionally, options traders should seek to sell time premium to benefit from stagnant financial markets. Tight stops should be used to ensure that financial markets don’t break below the 569 level or rise above the 589 level on a sustained basis. One other note: I will be giving an online options seminar today at 11 a.m. EST. to discuss more fully the approach for successful options trading. Sincerely, Charles Sachs Chief Options Strategist
Charles Sachs has utilized S&P 100 for the past 14 years, both as a trader and an advisor. He uses 24 proprietary indicators in order to structure options strategies which can generate gains whether the market moves up, down or sideways.