Weekly Stock Options Trading Tips: October 19, 2009

Option Trading Idea of the Week

Expiration Day Roll-Over Strategy

For a normal third-Friday expiration, we have maintained  that it doesn't make any real difference whether you buy back expiring out-of-the-money  options on Friday (if they cost $.05 or less, there is no commission at  thinkorswim) and also sell the next-month-out options on that  day, or whether you let them expire worthless and wait until the  following Monday to sell those options.
 
There are several reasons why the next-month-out options usually sell  for less on Monday than they do on the previous Friday (especially if  they are calls):
 

1. Two extra days  elapse for decay to take place (Saturday and Sunday).

2. Many investors  who sell covered calls do that selling on Monday, and that depresses  the prices of those calls.

3. Markets are  generally weaker on the Monday after an expiration.

 
All three of these reasons support the notion that even though there is  a small cost to buying back out-of-the-money soon-to-expire options on  Friday, the new options can be sold for sufficiently higher prices on  Friday to more than cover that small cost.
 
When a quarterly series is available (for SPY and DIA, quarterly options are available in March, June, September, and December, all  ending on the last trading day of the month), the best strategy changes.  There is no intervening weekend for the next-month options to decay over, and it is uncertain that the market is weaker  after a quarterly expiration as it is after the regular monthly  expirations (although last month, the market fell sharply on October  1st).
  
Therefore, the proper strategy for quarterly series expirations will  be to allow out-of-the-money options to expire worthless, and sell new  next-month options on the first calendar day of the new month.

Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth,  give him a jingle at 800-803-4595 and either ask him your question(s)   or give him your thoughts.
 
You can see every trade made in 7 actual option portfolios conducted at  Terry's Tips and learn all about the wonderful world of  options by subscribing here.   Why wait any longer to make this important investment in yourself?
 
I look forward to having you on board, and to prospering with you.
 
Terry

Andy's Market Report

The market  advanced for the second straight week on the backs of some better than  expected earnings reports and positive economic readings. The Dow  pushed above the 10,000 mark for the first time in over a year only to  finish the week slightly below what many market participants consider a  key level.

All ten of the major sectors finished the week higher and as a result  the S&P advanced 1.5% for the week for a total of 6% over the past  two weeks. The recent surge has once again pushed the broad market  index back into a short-term overbought state as the market heads into  the November options cycle.

The S&P 500 (SPY), Dow (DIA), Nasdaq 100 (QQQQ) and Russell (IWM)  advanced 1.5%, 1.3%, 0.8% and 0.2%, respectively. For the year, the  S&P 500 is up 20.4%, the Dow has advanced 13.9% and the Nasdaq is  leading the way with a 36.8% gain.

The stock market has been on a tear since it hit a 12-year low on March  9th. The S&P has gained 60.8% since the low.

"The market has had a very strong run off the March lows,"  said Michael Sheldon, chief market strategist at RDM Financial Group. "But now investors are looking to see if we can get a push higher after the third-quarter results are in, similar to what we saw after first and second-quarter earnings."

"Liquidity levels are helping to drive the market higher"  said Sheldon. "But I think we'll need to see some better economic news, in terms of employment, along with greater visibility from companies heading into 2010 to help propel stocks even higher."

Technically speaking, the S&P 500 (SPY) is still slightly in a  short-term overbought state with one of the bearish trading days approaching. The trading day following options expiration is overwhelmingly bearish so it would not surprise me to see a continuation of Friday's decline. If a decline does occur, we want to  keep an eye on the 1020 area of the S&P (SPX). Remember, the  earnings floodgates open up next week so it could be a pivotal week for  he market so if the market does indeed decline the 1020 area should be  closely watched as an area of strong support. How the market reacts  around that area will be telling as we head into the final months of  2009.

As I stated before next week should be an interesting one with an abundance of earnings and economic reports.  For the first time in weeks the market will be presented with an overwhelming amount of  information. How the market absorbs that info will ultimately define  the direction of the market over the coming months

 Andy

Overbought/Sold Condition Report

Overbought/Oversold as of October 16, 2009

Major Benchmarks

• S&P 500 (SPY) - 70.2 (neutral)

• Dow Jones (DIA) - 68.5 (neutral)

• Russell 2000 (IWM) - 58.1 (neutral)

• NASDAQ 100 (QQQQ) - 59.9 (neutral)

Testimonial of the week

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