Update for August 18, 2009

The S&P gained back 9.94 today after yesterdays sell off. Trying to get a feel for where we are headed, I did some technical analysis. The moving averages are bullish, with the SMA 10 above the SMA 20 (but with bearish divergence), and the SMA 200 is below the 20, at about 875. Parabolic SAR is giving a sell signal. If you were to go short here, PSAR places the stop loss at about 1,010.

If the tone is positive tommorow morning, I will take profits on my put options and buy more shares of MCD, PEP, and MO. Otherwise, I will wait for better gains on these. I will let the short calls ride for now. I am watching a solar company called CSIQ. I will hold off on this, as I feel that the potential for a bigger pull back between now and Christmas is considerably good.

For the indexes, the daily charts are showing a potential top formation, but it is not confirmed. The monthly and yearly charts are showing that we recently broke out from a 1-2-3 bottom, or "inverse head and shoulders" formation. In the long run, the monthly and yearly charts are the way to play this. Short term traders need to watch the daily chart more closely.

Volitility was up big yesterday, but gave up half of those gains today. One way to play the volitility is with a credit iron condor spread. The goal of this trade is to be market neutral, and profit from credits on option spreads. You can do this with your stock account with options on the symbol SPY (an etf that tracks the S&P deposit receipts). You can also use SSO, SDS, SH, etc., but I prefer the massive liquidity of SPY for this play.

To put on a credit condor, you sell a call, and buy a call with a further from the money strike price. You also sell a put, and buy a put with a further from the money strike price. The result is that you receive a credit from both option spreads. Loss and profit are both limited by the differences in premium (limits profit) and the difference in strike price of the (calls) or (puts). The best time to put on a credit condor is when volitility has been up, an example would be the early to mid July time frame when volitility spiked, and then came back down as the rally resumed.
When choosing which strikes to use in your condors, your goal is NOT to have short options (the ones you sold) go "in the money." I also like to put on this spread with anywhere from 10 days to 4 weeks until expiration. This is not a long term play, you want the odds on your side that the market will not shoot past the strikes of the short options on either side.

The play I still recommend for everyone, especially until we know we are out of the woods (which I beleive we are far from it now), is to buy high quality stocks or covered calls on these good dividend "blue chips." If we get a rally this week, you can sell calls against your position for higher premium and either buy puts (set a 30% loss limit on these) or hold the premium collected to buy more shares on a pull back. If you invest/trade this way, you will win in the long run. Also, it is best to use leap calls and puts. Let's say the market goes higher. You would have unloaded your puts for a modest 30% loss. You can buy back your short calls and "roll" them out-that is sell a further out strike (which will now bring back enough premium to cover the difference from buying/selling the original option, plus a profit). You can keep rolling out your calls indefinitely.

As always, you can e-mail me with questions or comments at lmrtrader@gmail.com , I would love to hear from you!