Options Recap, January 23, 2009

Pessimism, Volatility Rise!

Another depressing week as our 44th President of the United States takes office. The market fell -2.1% and is now down -7.9% for the year. The NASDAQ lost even more during the week with declines of -3.4%. The pessimism in the marketplace continues to boil, with volatility/fear again on the rise. The financial sector is driving the most fear, but corporate earnings for all sectors continue to deteriorate. The market remains above November lows, but nervousness and confidence is shaky as volatility and fear escalate. Fear is what investors have to watch, as that can cause quick and violent downward moves in stock prices. Current news on the whole is primarily bad, and that is not likely to change anytime soon, which will surely keep many investors on the sidelines. We expect market movements to remain rocky for some time.

Market Beating Foresight

Fourth quarter earnings season is in full swing. Next week, 137 companies in the S&P 500 will report earnings. There is little doubt those earnings reports will confirm what we already know. The economy is in dire straits as this will surely be another quarter of significant decline. 4th quarter GDP will also be released and is expected to show a contraction of more than 5%, a much larger decline than the previous quarter of .5%. There will also be reports next week on consumer confidence, home sales/prices, jobless claims, and manufacturing volume. The news next week is not likely to renew optimism in the market. We believe the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. We are also seeing increases in the volatility index and that could be a sign of more dramatic stock swings to come.

Option Tips For Investors

We expect the market to swing between a trading range of 800 and 925 over the near term. We also expect volatility (VIX) to trade between 40 and 60 over the next month. With that in mind, we may look to write a February call on the VIX at 60 and write a February VIX put at 40 if we can get in a good prices. This strategy would allow us to pick up income and will be a winning strategy as long as the index trades within this range. This is still a short term traders market, and for investors that can handle the risk, can be quite rewarding. The volatility in financial sector is intense, and that may present short term trading opportunities. For example, Bank of America stock (BAC) had daily moves of 30% on more than one day last week. That kind of volatility offers option players the chance to make a lot of money on positions over a very short time period. It may be worth the risk to play an option favorable to a move in the opposite direction after you see a large price change in your stock after just one trading day.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com