Options Market, Weekly Recap - February 6, 2009

Losing Streak Ends!

Last week brought an end to the weekly losing streak. The broad market gained 5.2% for the week, an excellent start to the month of February. Those gains are encouraging after following on the heels of the worst January performance on record. The tech sector was the real market leader as evidenced by a NASDAQ gain of 7.8%. The market though showed volatility after having been down early in the week before rallying over the last two trading sessions. Investor sentiment appears to be growing more positive, particularly now that the large institutional funds are done with massive selling. What was the driver for the gains this week? There were no real surprises on the economic front, so we speculate the optimism came from hope and closure over the pending government packages for the economy and financial sector. We are encouraged with the market advance, but caution there is still much uncertainty on the details of these packages. We will likely learn more details next week and that additional clarity will likely drive the market higher. However, we still expect the market to remain rocky over the near term.

Job Losses Hit Record Highs!

Quarterly Earnings releases continued last week and overall reflect the weight the poor economy is having on earnings and future outlooks. The uncertainty and lack of clarity on future guidance is still an achilles heel for many companies. Both the manufacturing and services surveys recently completed beat market expectations, but remain at poor levels indicating contraction. Personal spending and personal income both declined, not a big surprise given the state of affairs. Jobless claims hit another record high, and major companies continue to announce additional layoffs. Last week, it was reported that nearly 600,000 positions were lost in January, the largest monthly loss in 34 years. Surprisingly, the market rallied following announcement of the poor jobs data, presumably from the optimism surrounding government progress on the economic and financial sector stimulus. The unemployment rate now stands at 7.6%, but that is likely to grow over the next few months as we search for a climax in jobs lost. The financial sector had a volatile week, but ended the week over 6% higher as optimism returned over hope of financial sector reform.

Option Tips For Investors

Do we have option tips for investors? We expect the market to swing between a trading range of 825 and 925 over the near term. We also expect volatility (VIX) to trade between 35 and 50 over the next month. With that in mind, we may look to write a March call on the VIX at 55 and write a February VIX put at 35 if we can get in a good prices. This strategy allows us to pick up income as long as the index trades within this range. We may also look to write options on the market index. Writing puts are always more risky in volatile markets, so we would look for a put around an exercise price of 775, but only if the price is right. For a market index call, we would look for one to write in the 950 range. This is still a short term traders market, and can be quite rewarding for investors that can handle the risk. The financial sector remains very volatile right now, and that may present some short term trading opportunities.

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