Stocks and Gold Rally Despite a Decline in Crude Oil Prices: Yellin Speaks: Will There Be Follow Through?

Stocks put in a nice performance of Tuesday based on comments by Fed Chair Janet Yellin. The talk encouraged the markets to rally significantly and to remain above the E-mini S&P’s nine day Moving Average. The market is rapidly approaching the resistance levels between 2050 and 2080. Further, there hasn’t been a breach of the 2100 level in quite a while. The Chart below shows the difficulty above. That said, comments like todays from the Fed could potentially provide an impetus for a further up move. That leaves the conundrum for traders. Are we hitting resistance and heading lower or are we at a point where a rally appears likely? At Options Strategy Network we rarely provide a strong opinion about market direction, instead we help traders find the right strategy to meet their trading objectives.

For the Bullish Trader in the E-mini who believes that we could see a pop in the market to the upside due to end of the quarter buying and other factors, we present the first strategy below. It involves a Bull Fence ratio spread. It takes advantage of the Implied Volatility Skew in the E-minis and provides significant leverage. Unfortunately, this strategy incurs unlimited risk, because it involves the sale of a naked put. In addition, due to the recent rally, the Implied Volatility of the Put is relatively low. That issue, however, is made up for by the inexpensive price of the Calls we are purchasing. If one is not comfortable with the strikes I have chosen, they may choose different ones, or perhaps trade SPY (SPDR S&P 500 ETF) Options which are not as highly leveraged. The Chart below shows the Strikes, Prices and Ratio of the Trade.

The second strategy is for those who would like to establish a limited risk short position with good value. The position, once again, takes advantage of the Implied Volatility Skew in the E-minis. If one is not familiar with Implied Volatility, click the link for a recent article with a brief summation of it. In the limited risk short trade, the goal is to sell a call spread and purchase a put spread approximately equidistant from the current price of the underlying. The third Chart shows the efficiency of the trade. While the strikes are approximately equidistant from the current price of the underlying, one can sell the call spread at a premium to the purchase price of the put spread. This trade, for one that is interested in getting short, provides excellent value. One must keep in mind that the potential gains and losses of the transaction are pre-defined. At Options Strategy Network we assist traders in understanding the essential components of Options Trading. Liquidity, Implied and Historical Volatility, the Skew, choosing the right Options Trading Strategy and Risk Management are all of the essential requirements for Trading Options in a profitable manner. Contact us  to enhance your understanding of these issues. Our Private Webinar Training Sessions, for a fee of $75/hour, will enhance your options trading. 
 
OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

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