Traders Try To Push Stocks Lower, But Longs Say In Your Face: Setting Up For Record Highs?

It's always a good sign when the market trades lower but can't follow through. The last couple of days of trading in stocks have exhibited this type of behavior. Each day took the market lower, but losses were significantly pared. This type of trading may be indicative of a market looking to go higher despite its trading at strong resistance levels. 

The five minute Chart for the E-Mini S&P, shown below, provides evidence of the last five days of trading. Both Tuesday and Wednesday’s trading exhibited the same pattern. I think Monday can be discounted because of the holiday. If one believes that the strength of the market is its ability to come back despite nice sell-offs, then the question is should I get Long at these levels. My articles rarely make recommendations, but merely point out trading techniques that you might consider. Keep in mind Options Trading provides for significant leverage, both good and bad and you should only trade them if you know what you’re doing. Take a look at our Options Syllabus to see what you understand and see if you have the knowledge necessary to Trade Options effectively.

The Chart shows how nicely the S&P dealt with adversity and even closed higher today, Wednesday, June 1st. The issue is do you want to get Long Stocks near resistance levels or wait until a break out on the upside. I’ll save that for the technicians. For Options Traders who are comfortable buying Stocks at lower levels, there is always the Long Call Fence. This strategy, particularly in Stock Index Futures provides tremendous value for anyone willing to get Long the Index at a lower level (if necessary).

 

The Strategy shown below shows a Sale of one 1950 Put for July expiration and the Purchase of a 2170 Call. While the Strategy in the Table is for a one by one trade, the Strategy can be used in a ratio and still generate some premium for participating. Should you have an interest, you can Sell One 1950 Put and Buy Two 2170 Calls for a small credit.  In either case the Call you are purchasing is a little less than 4% from the current trading price while the Put is more than 6.5% from the current trading price. The Implied Volatility Skew provides this type of value, but should the market head lower, unless you really want to own some stocks, you’ll start feeling very uncomfortable.  As the market goes lower, you will not only lose money on your Long Deltas but likely on an increase in Implied Volatility.

 

Devising the appropriate Options Trading Strategy requires a wide range of Options Knowledge. Trading it; even more. Whenever you trade Options Contracts, be sure to evaluate Liquidity, Historical and Implied Volatility, the Implied Volatility Skew and the appropriate Options Trading Strategy to meet your goals. Try one of our Options Trading Webinars; it can help you with valuing Options and Setting up the Appropriate Options Trading Strategies.

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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