My indicators are squarely neutral again this week, unchanged from last week, as we remain locked in tight trading ranges for the broader indices and commodities. This kind of environment, without much real movement, is tough for all option traders, but we’ll follow the trend, which is flat.
As has been the case in recent weeks, there are both bullish and bearish indicators for what the next move will be.
The Dow Jones Transportation Average (DJT) continues to exhibit weakness, and we can’t ignore that we are treading on dangerous ground with this market. With interest rates essentially at zero and the S&P 500 at the high end of its historical price-to-earnings (P/E) range, we’re seeing bubbles start to form across many sectors. This is the time to buy more portfolio insurance, in the form of put options, which are cheaper now because volatility is low.
While headlines about the Greek debt crisis have dominated the news and swayed the market lately, I don’t think the final decision regarding Greece — if there ever is one — will have any significant impact on U.S. markets. Ultimately, I do believe Greece and its international creditors will negotiate a plan going forward because Germany needs Greece in the eurozone to weaken the euro to shore up exports. So, that’s at least one headline I’m generally ignoring.
On the bullish side, it’s worth noting that when we see increased bearishness in the market by way of headlines and talking heads, it’s usually a bullish sign. Bearish sentiment on Wall Street can be a contrarian indicator that often precedes a market rally.
Additionally, the market will wrap up trading for the month of June next week. We are also approaching the Fourth of July holiday in the United States, and the week leading up to the holiday generally has a bullish bias. So, as things are relatively quiet, this is the time to buy insurance: when volatility is low. When things start to heat up, there will be no bargains to be had. And that is the rationale behind the following trade recommendation.
Buy to open the United States Steel Corporation (X) Aug 21 Puts (X 150821P00021000) at $1.10 or lower. After entry, take profits if the stock price hits $19.60 or the option price hits $2.30. Exit if the stock price closes above $23.20.
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