Dip Will Be Brief and Shallow: Sell Puts and Be Ready to Buy Calls

11/05/2014 8:00 am EST

Focus: OPTIONS

Since he doesn’t want to get caught on the wrong side of a trade after the election results pour in, Pete Stolcers, of OneOption.com, is planning to implement an options strategy that will give him maximum flexibility while the market figures out its next move.

This is the day we’ve all been waiting for: no more political ads. The GOP is expected to win and they should have the Senate majority by one or two seats.

The market tried to breakout to a new high Monday, but the move failed to gain traction. I bought the S&P on the breakout and I scratched the trade when the market pulled back. We did not close on the highs of the day, so I did not buy calls.

The price action Tuesday morning is soft and it looks like we might fill the gap from Friday. I have been buying back my put spreads and selling put spreads closer to the money (rolling up). This strategy still leaves me with breathing room in the event that we see a little profit-taking.

I will buy the S&P if we breakout above SPY $202 and I will buy calls if we close near the higher the day. I won’t get overly aggressive if this scenario plays out because a lot of the move will be sparked by bullish speculators.

Seasonal strength will attract buyers from this point on and under-allocated Asset Managers will get anxious. They don’t want to miss a yearend rally and I believe the bid will be strong. Any dip will be brief and shallow.

Saudi Arabia plans to dump oil in the US to discourage domestic drilling. That is good for consumers, but bad for the economy, since oil production has generated good paying jobs.

ISM manufacturing was very strong Monday and the employment numbers should be excellent this week. The Fed cited strong job growth in their statement last week and initial jobless claims have been falling the last month. ADP will post its number Wednesday.

I’m not expecting any big news out of the ECB on Thursday. They launched QE and the bank stress tests have been posted. They will let these events run their course.

The Fed kept the phrase “considerable time” in their statement and they will remain accommodative. The Bank of Japan launched a huge round of easing last week and that sparked a global rally.

Earnings season has been excellent. Over 75% of companies have exceeded earnings estimates and profits have grown 7.5% year-over-year (the highest level in four years).

My tactic at this juncture is to sell out-of-the-money (OTM) put credit spreads and to buy the S&P futures (day trade) if we breakout. If the breakout holds, I will buy some calls. If the market drifts lower and we fill in the gap, I won’t short any futures. I don’t want to get caught on the wrong side. I will wait patiently for support and then I will buy calls.

This strategy gives me maximum flexibility while the market figures out its next move.

If the Democrats pull off a surprise victory (25% chance) and they retain the Senate, we could see a selloff Wednesday. I don’t think it will be too nasty, but it could be 20 S&P points.

Look for choppy price action with a negative bias. I would like to see the gap filled so that I can gauge profit-taking and so that I can gauge the strength of the bid.

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By Pete Stolcers of OneOption.com

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