Market Summary
Thus far stocks have had a very good January, up almost 5% driven by the perception of an improving economy in the U.S.
Investor Analysis
From a technical analysis perspective, the major indexes are considered 'overbought' and upward momentum has slowed considerably – this might suggest stock prices are due for a pause, if not a pullback. No one is predicting a serious price correction, but it is reasonable to expect stocks to maintain at the current level for a while. Take a look at the weekly DIA chart below - the DIA is an exchange traded fund (ETF) that seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the Dow Jones Industrial Average (DJIA). The chart tells us that the DOW has moved up to its multi-year high and it is reasonable to expect a pause before it moves much higher. There are several viable strategies to take advantage of current DOW Jones Industrial price action.
Possible Strategy
Investors can consider a credit spread strategy to benefit from the upward push in stock prices. A simple trade is to sell an out-of-the money (OTM) stock or option and protecting yourself by simultaneously buying the exact same investment, but even further out-of-the-money (OTM).
For example, selling the February $129 strike price DIA call option for .75 (yesterday's closing price) and simultaneously buying the February $132 call at .15 would generate a .60 per share credit to your trading account (.75 minus .15). You get to keep the .60 per share credit (multiplied by the number of shares represented by the option contracts) if the DIA closes below $129 on February 17th. Sign up for the latest trade at http://www.theoptionplayer.com/ for additional information and option trading strategies.
By Gregory Clay
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