Two Fridays ago, the S&P 500 finished above its upper Bollinger Band 4 out of 5 days. It made sense for the market to correct, yet so far the correction has been sideways and rotational in nature.
We're approaching a tricky part in the markets. See, holiday trading is upon us. Generally that means lighter volume and low volatility.
So if you're looking for a deep pullback to buy into, you may be disappointed and will have to wait until 2017 starts to get any kind of action.
The question now is... do you wait and miss out on income into the end of the year, or do you risk entering into a ton of spreads with the potential of volatility to pick up all of a sudden?
There's no easy answer to this... in fact this is the MAJOR task we face as option spread sellers. The next few weeks simply provide a more acute demonstration of this.
One advantage we have is the option skew.
Out of the money puts still carry plenty of premium, even in the face of a quieter trading season.
If you choose longer duration options, out to February, you do run the risk of volatility to pick up starting in January. That's why it's still important to pick the best spots and scale out of your trades.
Today we'll look at a setup in the RUT and a review of an idea we've been watching in CAT.
Trade #1: RUT
The Russell 2000 index has been incredibly strong since the US election catalyst early November.
While it may seem like the market has gone too high too fast... keep in mind that volatility expansions like this rarely see full reversion. And even if it does, it takes time for that to happen.
Since this rally started, the market hasn't touched its rising 20 day moving average. I expect that as it pulls in, eager buyers will step up to make sure they don't miss out.
Expected Price: 1346-1350 (The 20 day MA will adjust over time)
Sell to Open RUT Feb 1230/1220 Put Spread
Tier 1: Enter at 0.90, exit at .50
Tier 2: Enter at 1.50, exit at .90
Tier 3: Enter at 2.00, exit at 1.50
Trade #2: CAT
f there's one area that got a little too much play in the media, it was the whole "infrastructure" story.
What happens here is that a catalyst happens. That drives the media and investors to cling to a narrative. A popular narrative since November was the resurgence in infrastructure stocks.
What I see here is a stock that put in a capitulative low a year ago and has been staristepping higher ever since.
If it pulls into 90, it will retest a key breakout level, as well as test a rising 50 day moving average.
Expected Stock Price: 90
Sell to open CAT Feb 80/77.50 Put Spread
Tier 1: Enter at 0.30, exit at .10
Tier 2: Enter at 0.45, exit at .30
Tier 3: Enter at 0.60, exit at 0.45