Buy Puts—Use These Levels As Your Guide

08/13/2015 8:00 am EST

Focus: OPTIONS

In a follow-up to his article on Tuesday, option trader Pete Stolcers, of OneOption.com, takes another technical look at the S&P 500 and explains that his new options plan is to add on weakness Wednesday, using the 200-day moving average as his guide. Pete also suggests looking for an opportunity to buy puts and to watch the major support levels he outlines.

Posted 9:30 AM ET Wednesday—The price action this week has been bearish. Stocks tried to rally off of major support Monday and they were immediately slapped down Tuesday. The 200-day moving average will be breached Wednesday morning.

Tuesday I encouraged you to buy some puts. I hope you took my advice.

China’s economic numbers were much better than feared (retail sales, IP, and foreign investment). However, the PBOC devalued the yuan for a second straight day. Traders are worried that they know something we don’t. Without question, economic activity in China is slowing. This is the largest economy in the world and our market has completely discounted the news.

Asset managers are not going to aggressively bid ahead of a potential interest rate hike in September. They will pull bids and gauge profit-taking during this decline. In the last five years, the 200-day moving average has represented a buying opportunity when it has been tested. That is no longer the case.

The SPY rests just above the 200-day uptrend line ($206). Major horizontal support is at $204.40. If these two levels fail, we will see the 10% correction everyone has been waiting for.

There isn’t a white knight news event that will save the day. The Fed is on recess and officials will not show their hand. Fiscal and monetary stimulus doesn’t pack any punch anyway so it won’t matter. Earnings season is just about over and the economic news is very light (flash PMIs are the next big release in ten days).

August is a seasonally weak month and we could see selling through the September FOMC meeting.

I own puts and I plan to add on weakness Wednesday. I will use the 200-day moving average as my guide.

If you don’t own any puts, don’t rush in on the open. The news was not that dire and we will probably get a bounce. If the market makes a new low for the day after one hour of trading, buy puts. Add on weakness.

I’m much more interested in a gradual decline. That type of slide is typically marked by a higher open and a close on the low of the day with late day selling.

Look for an opportunity to buy puts and watch those major support levels I’ve outlined.

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By Pete Stolcers of OneOption.com

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