Monday, December 12, 2011 Investor Report

Market Summary

The rest of the week should be interesting from an investor perspective as there will be a lot of headline news and don't be surprised if we get a trend change (either up or down). Some of the data scheduled to be reported is business inventories on Tuesday followed by import and export prices on Wednesday. On Thursday we get jobless claims, producer prices, industrial production and the Philly Fed survey followed by the Consumer Price Index on Friday. Also, next week there is a Federal Reserve meeting and the week ends with triple-witching day on Friday – the end-of-quarter simultaneous expiration of stock index future, stock index options and stock options for December. All bets are off concerning where prices might end the week as we should expect high volatility heavy trading volume.

Investor Analysis

For the month of December the bulls and bears appear to be engaged in a tug-of-war centered on the major equity indexes near term resistance levels. For example note in the SPY daily chart below how the index has traded range-bound between $123 at support and $127 as resistance. Also, note in the chart how it has stayed close to its 200-day SMA which is acting like a magnet and keeping the index from going much higher or lower than this level. Every time the price approached the $127 resistance, sellers stepped in and pushed prices back down. And when prices start to pull back towards the $123 support level, the bulls step in to buy and squeeze the price action back up towards resistance.

Possible Strategy

If the current range-bound trading environment continues a many traders are considering credit spread trading strategies to take advantage of the non-directional nature of the current market price action. Especially as index prices consolidate near resistance levels, selling an out-of-the-money (OTM) stock or option and protecting the position by simultaneously purchasing the exact same investment, but even further OTM. For example, selling a January $132 strike price SPY call option for .63 (Yesterday's closing price) and simultaneously buying the January $139 at .13 would generate a .60 credit premium to the investors account multiplied by the number of shares represented by the option contracts. The investor would keep the funds if the SPY ended below $132 on January 20^th expiration. Of course the investor should exercise a risk management strategy if the market went against the trade. Sign up for the http://blog.theoptiontrader.com for additional option trading strategies.