January 3, 2008 - Market Recap

Today, I wanted to show the Russell 2000 and where it stands for possible options trading. The first graph shows the Bollinger Band for a 45 day period, and a width of 2.5 standard deviations. As can be seen from this graph the band is narrowing which shows we are in a consolidation phase since the November low. Based on that the move may be more drastic in the near future. The question will be if it will be up or down. Based upon how long it took to go from the October high to the November low was 33 trading days. Notice how narrow the band was leading into that as well. That was approximately a 12.25% loss in those 33 days. That was from a high down to a low.The next chart shows the support and resistance lines. There is a lot of support from the short term right around 740. The next support will be at 668. That is the green line at the bottom that is supported by the July 2006 low. Doing a look at the 68% probability of expiring on February 2008 Russell 2000 options, the point is right at the 670 mark. Based on that, it appears that the setup that I mentioned yesterday would be good. Sell a 670 Put and buy a 660 put. The vertical spread yields about $125 and if it goes a month and I buy it back for 20 would give about a $95 after paying commissions while tying up about $900. I will monitor the position carefully. If it drops too much and I lose $100, I will be out of the trade.