Option trader Pete Stolcers, of OneOption.com, outlines the option trading strategy he prefers, illustrates that the S&P 500 has been in a trading range for three months, and recommends staying long, since the longer and tighter the range, the bigger the breakout.

Options Trading Strategy—I have been buying call options on stocks that are breaking out. This is my preferred options trading strategy since this looks like a sustained move. Option implied volatilities are low and I’m not properly rewarded for selling bull put spreads. Besides, I can make a lot more money buying call options if we do see a melt up. The key to buying options is timing and the table is set for a nice move. If the momentum stalls, I won’t hesitate to pull the plug.

I am also day trading. I will buy the futures off of this dip once support is established and we make a higher low. I will use the low of the day as my stop.

Posted 9:45 AM ET Wednesday—A chart of the S&P 500 clearly shows the breakout and the follow-through buying we needed for confirmation. In a candlestick display, you can also see a series of green bodies. This indicates that the market has opened on its low and closed on its high for many consecutive days.

Stocks are a little weak on the open Wednesday and we can expect the bid to firm up as the day unfolds. Under-allocated asset managers will get anxious as stocks tick higher. They don’t want to miss the next big move.

Janet Yellen’s comments were generally dovish Tuesday and she will testify before the House Wednesday. Many believe that she paved the way to remove the word “patient” during the March FOMC meeting. Even if the word is removed, the Fed is unlikely to tighten before June.

China’s flash PMI came in at 50.1 and that was much better than the 49.5 that was expected. After a horrible trade number two weeks ago, this release had the potential to disappoint. Retail sales increased 11% and that was much lower than the 13.3% that was expected. The Chinese New Year is very important to their economy and the results could be a red flag. Casino revenues in Macau were also down substantially. But don’t worry; traders feel the PBOC is waiting in the wings.

Durable goods orders and GDP will not have a major impact and they’re the only economic releases worth mention.

Greece got the loan extension and I don’t see any speed bumps the rest of the week.

The S&P 500 has been in a trading range for three months. The longer and tighter the range, the bigger the breakout.

Stay long and ride this breakout.

chart
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By Pete Stolcers of OneOption.com