A quick look at an easy option strategy

Every time I mention options it causes people to have quite a negative reaction. I am not recommending anyone start trading options here but I thought I would show one of the reasons why I trade options.

You can see here on the $NYMO and the $SPX in August the market reached a very oversold level. The problem is we don't know at this stage if there are further falls to come. We want to gain some exposure to the potential upside. When the $NYMO went -60 and the RSI on the $SPX chart was below 20 we can be fairly sure that there is likely to be a rebound but we don't want to go long with an index CFD because there could be more downside. In this case you can buy out of the money December calls which gives you enough time to let the upside move develop.

In early October the profit takers move in when the $NYMO is showing that the market is overly bullish. When the market gets to extreme over bought in late October we can sell to close the December calls at a nice profit.

The market then turns down in early November so we can buy January puts to gain exposure to the downside in the lead-up to the FOMC. The market has reached an oversold condition again as you can see on the chart here currently, you can sell to close the puts at a nice profit.

We are looking to trade the extreme conditions. We are not interested in what happens between the green and red line. I am not looking to trade over Christmas because I am going to have a break. If I wanted to I could buy March calls now in anticipation of the Fed raising by .25%. We are expecting a rate rise to be bullish for stocks but it could well be that the market has already priced in a rate rise and they decide to sell the news. In this case we don't want to be exposed with CFD's. If the market does sell off then the worst that can happen is that the options expire out of the money by March because the $SPX did not reach our strike price. All we can lose is the premium paid for the option. When you look at it this way it is not really that hard to understand the benefits of options.

This is just an example of what is possible. Not intended as trading advice.