Hang Onto Your Put Options: The Market Is Headed Lower—200-Day MA Will Be Tested

01/30/2015 9:00 am EST

Focus: OPTIONS

Since some of his biggest winners have come after losses, option trader Pete Stolcers, of OneOption.com, follows up his recent pre-FOMC article with a post-FOMC article outlining a major fundamental change and what this could mean for option traders moving forward.

Option Trading Strategy: My options trading strategy is very simple. I started buying puts Wednesday morning, and after the FOMC, I added aggressively as outlined. I did not wait for my price levels; I just started buying puts when dovish statements failed to spark a rally.

Some of my biggest winners have come after losses. I sold out-of-the-money put credit spreads last week. I thought earnings season would float the market for a few weeks and that I would be able to take advantage of time decay. I kept my distance and I did not hesitate to buy my spreads back Tuesday when the market gapped lower. My losses were small and that price action told me that we were headed lower…right away.

Posted 10:00 AM ET Thursday-If you followed my advice Tuesday, you made a pile of money. The good news is that this decline still has more downside.

The technicals have been deteriorating since October. That was the first time that we've breached the 200-day moving average in two years. In the last six weeks, the 100-day moving average has been tested four times. We are getting light volume rallies and heavy volume declines. December and January are seasonally bullish and they did not attract buyers. We now have a series of lower highs and the 200-day moving average will be challenged in a few days. I'm expecting it to fail and we could test the lows from October (SPY $182).

I told you in my comments Tuesday that this is the most bearish I've been in years. I also said that I would aggressively be buying puts after the FOMC statement. The rhetoric was dovish and the market did not care. This brings me to a major fundamental change.

Central banks have been easing and the market no longer cares. QE is not stimulating economic growth and these moves no longer pack any punch.

Other fundamentals are also deteriorating. Europe and Japan could easily slip into a recession. China's growth has been leaking oil steadily for many months. A sudden slowdown could raise credit issues in their shadow banking industry. Domestic economic growth has been strong, but the dollar has been surging and that will impact exports. The strong dollar has also weighed on earnings.

International companies are missing earnings estimates and a strong dollar is getting some of the blame. Guidance has also been cautious.

Greece is back in the headlines. The anti-austerity Syriza party won and you would think that there rhetoric would be toned down ahead of February 28th. That is when Greece will receive its next tranche from the ECB. New leaders are vocal and they will challenge fiscal spending constraints. Credit concerns are escalating and Greek bond yields are spiking.

The little rally Thursday morning failed quickly and the market is probing for support. I am expecting SPY $197 to be tested quickly and it will fail. Once we are below the 200-Day MA, the price action will get a little choppy. We will see declines and brief rallies before we establish a low. I will be taking profits on my put positions when we hit an air pocket, but that won't be anytime soon. I would prefer to see a steady decline lower, but that is not common for bearish moves. The market takes the stairs up and the elevator down.

Look for steady selling.

Buy Puts

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By Pete Stolcers of OneOption.com

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