Level 1 Option Report 

Level 1 keeps it fast and simple. Three times a month we'll tell you when to buy a call or a put on a stock that's about to move. This service uses the most basic option strategy and it requires the least amount of capital. It can fire at any time and when it does - you'll know. 

Issue     01/29/2010 Recent Reports     Past Reports    

Bearish SPY
Stock Option Trading Strategy Buy in the money puts.
Stock Option Trade Buy 20 SPY Feb $110 puts (SPYNF) contingent on the SPY trading below $107.90 - Day. Filled 1/29/10

Contingent on the SPY closing below $108, buy 20 SPY Feb $110 puts for no more than $4.00 - Day. Filled 1/29/10
Stock Option Target Sell 40 SPY Feb $110 puts @ $2.00. Filled 2/2/10
Stock Option Stop None
Stock Description Standard and Poors 500 Depository Receipts
call option trade

Option Trade Rationale Yesterday, the market continued to slide. Overseas markets were weak and cyclical stocks gave cautious outlooks after releasing earnings. Initial jobless claims disappointed for the third straight week and investors hit the exits.

Before the open, the first estimate for Q4 GDP was released. Analysts were looking for 4.6% and the US economy grew by 5.7%. The S&P 500 instantly shot eight points higher on the news. Businesses are building inventories and they are starting to spend a little more (business spending up 2.9%). This was the strongest growth we've seen in more than six years. After the open, Chicago PMI rose to 61.5 when analysts were forecasting 57.4. A number above 50 indicates economic expansion.

Consumer confidence rose to a two-year high and the index hit 74.4 in January. Consumer spending accounts for 70% of our GDP growth and last it accounted for 1.4% of the 5.7% increase. The high unemployment rate will keep spending in check.

Ben Bernanke is back at the helm and that uncertainty has also been lifted. His reappointment should have been much easier than it was and the market is worried that Congress wants a bigger role.

Market conditions deteriorated quickly in the last two weeks and we were due for a bounce. As I explained yesterday, Mondays have been bullish and we have seen rallies for 12 consecutive weeks. End of month fund buying will support the market and we should see a rally that lasts a day or two.

Earnings have been good and Microsoft handily beat estimates. That has helped the tech sector a bit.

There are still major concerns in Europe and bond yields in weak countries are pricing in a hefty risk premium. The credit crisis is far from over. In most cases the risk has simply shifted from banks to governments. Governments have deeper pockets to shoulder the risk, but when they collapse the fallout is widespread. I have been saying for months that this is a big potential problem. We have major issues in the United States, but Europe is in even worse shape than we are.
Trading Game Plan Normally, after such a steep decline you would see some short covering. This rally today is on tenuous footing and sellers are taking advantage of any rally. Last year, each decline was viewed as a buying opportunity and the dips were brief and shallow. That is not the case this time around and I believe support at SPY 108 will be tested today.

If we can't rally on great economic news, this market is in big trouble.
Stock Option Track Record 1/29/10 - Bought 20 SPY Feb $110 puts @ $3.40

1/29/10 - Bought 20 SPY Feb $110 puts @ $3.65

2/2/10 - Sold 40 SPY Feb $110 puts @ $2.00. The market rebounded back above major support. The financial crisis in Europe is brewing, but it is not to the point where we will see a default in the next few weeks. This might take months to materialize. There are at least 4 countires that could default. Until then, the market will focus on positive economic news. We had to step aside and look for a better entry point for shorts. We lost $6130 (40 x $1.52 plus commissions 3 x $10).