Stocks have been taking a beating lately, but as you’ve heard me say before nothing goes down forever and nothing goes up forever. Markets tend to move in a stair step pattern of 3s.
Take a look at the SPY ($138.68, up $0.41) chart below which has the 50 and 200 day EMA. These EMAs are what I look to refer to as the hedge fund moving averages. The big funds will use these moving averages as a place to put their buy orders. I’ve yet to see any market crash through its 200-day moving average. As you can see today buyers have stepped in to defend that 200 day moving average and we are getting a heck of a rally.
So how should you play it? Well don’t buy directional calls here. The pressure is still to the downside.
So you want a strategy where you can still profit from a slightly up move, a sideways move, or a slightly down move. This is where selling a put credit spread comes in. Timing is everything and this week I am expecting stocks to hold the lows of last week and that 200 day moving average. A dead cat bounce can take the S&P to 1400 by the end of this week.
Sell the Nov 138.5 puts. Buy the 136.5 puts for protection. You should be able to get a credit of about 50 cents or $50 per contract (break-even ~138, risk $150). If you are worried about the chance of a market crash this week (last trading day for November options is this Friday the 16th) then buy some cheap out of the money puts with the premium you just collected on the put credit spread you sold. You can pick up the 134 puts for a nickel. This cheap insurance protects you in case of a calamity.