I don’t often get this bullish

Back Where We Started, What to Do?

This market looks stoked, that is for sure. The way the DELL
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news was digested was impressive, and taking a step back and looking at October as a whole, the way the Refco
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news was digested was also impressive. I still firmly believe that even if Refco had never happened, we would have had a sell off anyway as everyone and their mother was bulled up at the end of September – just like now!

I do think the market looks good – a big statement from me, as I tend to be a bear, probably because I look like one. It looks like the bond market is okay with this morning’s payroll data, so, for the moment, we are okay. It is the bond market that has the potential to trip this market, and it needs to be watched closely.

Price wise, as I mentioned, everything is fairly close to where it was at the end of September:

SPX

The SPX closed at 1228 at September’s end, settled at about 1220 yesterday. This puts it solidly in the middle of the late summer 1200 -1240 trading range. I believe the appropriate trade here is a long butterfly or condor enveloping this range. In our Trading Markets Option College class we are long the SPY November 120/122/124 call butterfly.

NDX

The NDX – the star of the show in October, relatively speaking- is perched right on its highs, a very exciting situation. As I have mentioned before in this space, I like to attack this type of setup by purchasing a straddle at a strike equivalent to the breakout point (you could use 1625 in NDX or 40 in the QQQQ’s), and then looking for either a sharp move through resistance, or a rejection. In this situation, in the case of a rejection or a retracement, I look to sell the out the put side of the straddle at a price close to the price of the entire straddle, leaving me long calls for free. Given market location, volatility is a little higher than I would have expected, but it is finally coming down a bit. I like this play, and Friday volatility “rinse” would give you a good opportunity to put it on (assuming QQQQ’s / NDX hold their ground).

One argument for a correction is that the VIX (VXN) have dropped well below their respective 10-period MA’s, usually signaling an overbought market. These indicators worked very well in October.

VIX

VXN

This market acts well, but I am looking for a pause/pullback here. The major indices are parked in the middle of their summer trading ranges, and they may need to pullback and get a running start in order to break through resistance. “They” will engineer this or die trying, so plan for it!

Joe Corona

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.