Here’s how to trade the next rally with options
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 structure options strategies which can generate gains whether the market moves up, down or sideways.
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 Friday up 1.83 points to the 569.01 level.
Our country has experienced a fair amount of turmoil this past year. From an economic perspective, analysts have been discussing on a daily basis the rising prices and demand for oil worldwide, and the potential shocks of these high prices to our economy. Socially, there have been the terrible consequences resulting from the hurricanes that struck the Gulf states, and southern regions of our country. Politically there is great division among our citizens with respect to the war in Iraq, and other important issues.
From a humanistic viewpoint, these economic, social and political issues are of great concern and deserve serious debate. However from the narrow perspective of a stock market analyst, these events are a non-issue.
Here are the facts. The S&P 100 index closed at the 575.29 level on December 31, 2004. The index is trading at the 569 level presently, or essentially unchanged for the year.
In looking at the chart below, we see that the S&P 100 index has traded in a very narrow range for most of the year between the 555 and 577 levels.
In essence, nothing has really happened in financial markets for the entire year. The total yearly range for the S&P 100 from its lowest to its highest price is 8%, and the index has been locked in a very narrow trading range of about 4% for most of the year.
So why all the attention in the financial media to the aforementioned crises? Clearly there is a need for a good story. This is one of the problems of getting your business news in the media, especially on television. The news is skewed to create a story so it is compelling. It is difficult to sell advertising without a compelling story.
While the truth is that very little has happened in financial markets this year, this does not mean that there are not excellent opportunities to profit with options. Unlike common perception, successful options trading isn’t an adrenaline rush. It requires a lot of patience. A good options trader first awaits for the right trading opportunity to arise, and then holds the options while they accrue profits through the passage of time.
Bottom Line:
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 this year. It is likely that financial markets will remain in the trading range set forth in the chart above. This means that traders can look to execute long positions when the S&P 100 index declines to between the 543-555 levels and seek to take profits, or enter short positions when the index rises to between the 577-585 levels. In the very short-term, financial markets are technically overbought and are primed to enter a short-term decline phase to offset their overbought condition. Since the trend in the markets remains up, traders should structure options strategies with an upward bias following the next short-term decline phase to take advantage of the temporary market weakness.
Sincerely, Charles Sachs Chief Options Strategist