by John Lansing | September 25, 2012 8:51 am
While market players were focused on the green tape after the Fed announcement, I’ve been watching individual sectors and subsectors flop and fail in the midst of a broader market move up.
By the closing bell on September options expiration day, oil, the PHLX Semiconductor Index and the PHLX Bank Sector Index had all dropped nearly 3% for the week. So while the broader averages largely held up in a sideways trading environment, the same cannot be said for individual sectors.
One space that’s looking particularly weak is the steel sector. The Market Vectors Steel ETF (NYSE:SLX) declined almost 6% last week and opened up Monday sharply lower still. A big name within that space that I’ve been tracking closely is U.S. Steel (NYSE:X), which is gunning toward 52-week lows as it looks to be building a bearish descending triangle.
A descending triangle pattern only has a 4% failure rate and yields an average decline of 19% when it occurs. That means, even with X’s recent 7% decline, there could be further downside ahead for the steel stock.
Right now, my charts suggest continued sideways movement is likely for the broader market for the first part of this trading week, which then says the best option trades in this environment are the ones where we quickly take advantage of the volatility in individual names and sell to open (or short) options for in-and-out trades.
Remember: If you have a bearish outlook on a stock, you want to short calls. The strategy is that you sell to open a call and, as the underlying stock begins to decline, so does the call’s premium. Then you can buy the call back cheaper and cover your short position. You pocket the difference.
The converse is true for a bullish outlook on a stock; you want to short puts. As the underlying stock begins to appreciate, the premium in the put will decay, and you can then buy it back at a lower price to cover your short trade. Again, your profit is the difference.
Whatever your options strategy, be sure you have some ideas to make money in a downturn, like we’re using at Parabolic Options. While this market is holding up all right for now, the individual sectors are signaling that something is afoot, so don’t be so quick to try to ride the bull just yet.
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