Market Testing the All-Time High—Day Trade Call Options on Any Dip

02/16/2015 8:00 am EST

Focus: OPTIONS

Option trader Pete Stolcers, of OneOption.com, shares a review of last week’s market action, highlights his outlook for this week—given that economic news will be fairly light since Monday’s an exchange holiday—and offers plays for both option and day traders to consider.

Bullish Put Spreads—This is one of the most powerful options trading strategies and you should learn it.

Posted 10:15 AM EST—Thursday, the market took a breather after a big run the last ten days. A cease-fire in the Ukraine is pushing stocks higher and we are bumping up against the all-time high.

Greece and the EU are negotiating the terms of the next loan, but an agreement has not been reached. The market is pricing in a deal and they will probably find middle ground at some point this week. If they can’t come to terms, they will arrange for emergency funding while they continue to talk.

The FOMC minutes will be released this week and I believe members will be dovish. The Fed is still worried about global economic activity and the dollar rally. January’s job report was strong and some traders are worried that the tightening timeline will be moved forward. This week’s FOMC minutes should put them at ease.

If you bring up a chart of the SPY you can see strong rallies during options expiration week in September, October, November, and December. I believe that the market will breakout this week ahead of options expiration. Anyone who sold calls above the all-time high will get squeezed. When they are forced to buy back those positions, they will add fuel to the rally.

Cisco (CSCO) posted excellent earnings Wednesday and they cited strong growth in Europe. Applied Materials (AMAT) was okay and Network Appliance (NTAP) disappointed. Earnings season is winding down and the results have been good.

The economic news will be fairly light this week and Monday is an exchange holiday.

In Wednesday’s comments, I stated that I will not trade the short side. It is foolish to trade against the momentum. When stocks were near their low Wednesday, we saw a 6 point move in the S&P in less than 2 minutes. These moves are devastating for day traders and that is exactly why I did not play the short side. Once we rallied back above the one hour low, I bought the dip and I rode it back to the one hour high. This will yield a nice profit on my SPY calls and this was my suggested strategy.

I will use the same tactic Thursday. I will get long if the market is above the one hour high and I will keep a tight stop. My first target is SPY $209 (all-time high). If the market trades below the one hour low, I will not get short. I will buy SPY calls if we rallied back above the one hour low. My stops will be tight and my target will be the high from the first hour of trading.

I didn’t want to buy call options and hold them overnight when we have a major holiday on Monday. If the price action looks strong this week and we make a new all-time high, I will buy call options and hold overnight.

The market wants to run higher Thursday. There is overnight resistance at the all-time high and I don’t know that we have enough good news to push us through Thursday.

If you want to play it safe, consider selling out-of-the-money bullish put spreads that expire in February. Make sure that you have technical support between the stock price and the short strike price. If that support is breached, buy back the put spread. Time decay will be working in your favor.

The best day trade Thursday will come if we get a dip. Try to buy it and take profits near the high the day. I don’t believe we will see a big breakout Thursday with major resistance looming.

chart
LivevolX® www.livevol.com
Click to Enlarge

By Pete Stolcers of OneOption.com

Related Articles on OPTIONS