Planning an attack on the highs…
Planning An Attack On The
Highs…
As I noted last week, there seem to be some similarities between the way the
market reacted after the terror bombings in London on July 7 and the way the
market is reacting to the Katrina disaster. In both cases, the market revealed
its strength by chewing up the bad news and putting in strong rallies. As oil
starts to drop, a test of recent highs seems imminent in the major indices:
When strong resistance (support) levels are
challenged, there are usually two outcomes. Either the resistance (support) is
“taken outâ€, and the market moves to a new area (“breakoutâ€), or the resistance
(support) level holds and the market retreats sharply from the key level. In
essence, the resistance (support) level acts as a “repellent zone†to price. It
either breaks through or retreats, it does not stay there.
This plays into the hands of the tactical
straddle buyer. Buyers of straddles are looking for sharp moves away from the
strike price, and this setup will usually give you that type of action. The way
I like to play this scenario is to buy straddles at the strike nearest the key
resistance (support) level when this level is being tested. It is critically
important that you monitor these tests because they usually do not last very
long.
Although volatility is not dirt cheap, it has
come down and seems reasonable, given the time of year and the general angst in
the market. Once you have a straddle on, you monitor the activity of the market.
If the market breaks out you hold the straddle and ride it. If the market backs
off sharply from resistance, and you are overall bullish, you may want to scale
sell the put portion of the straddle and work into a long call position at a low
cost basis, holding for another test of the resistance level where you can play
the game again!
SPX
QQQQ
Joe
Joe Corona is a 23-year veteran trader who makes his living trading options
and other derivatives. Mr. Corona has been a floor trader on numerous exchanges
including the CBOE, CBOT, and CME. Joe most recently spent 4 years as Head
Trader for Market Wizard Tony Saliba at Salibaco, a proprietary trading firm. He
has also been an options instructor for the International Trading Institute
where he has trained hundreds of options and derivative traders for major
institutional trading desks worldwide. Joe is the Director of the Asia Pacific
region for CDLS Consulting, LLC which specializes in trading U.S., European, and
Asian options and derivatives.