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Phillip Wiegand, Optionetics.com
October 8, 2001

It was great to have a couple of days to relax and get our wits about us in regards to the prospects of this market.  Unfortunately, I was not able to develop any new profound revelations about the state of our affairs; however, there are an unbelievable amount of opportunities to make substantial money in this environment.  The movements that the market granted traders this past week were phenomenal and nice money was there for the taking on both the long and short side.  

I am a firm believer in separating your short-term trading from your long-term investments.  In regards to the short-term, stay non-directional.  Your objectives should be to get into trades that are delta neutral, gamma positive, and theta positive.  It is difficult to accomplish this right from the get go, but after making some adjustments this should be easily achieved. You may even find a trade that has no risk at all.  As for long-term investments, keep your risk as minimal as possible and use collars to create no risk trades as well.  We are armed with the tools necessary to go battle with confidence and succeed in any market environment; but we must incorporate the appropriate strategies in order to do this.

I think that it is a safe bet that the volatility in the market will continue this week and we should be prepared for it.  The retaliation from the United States has begun on Afghanistan and we are likely in a prolonged conflict that will not be over any time soon.  This may have substantial impacts on the stock market; different pieces of news will cause various reactions from traders.  Markets tend to rally as the bombs are being dropped, but this could be very short lived given the results of the military operations.  Unfortunately, there is no way to predict these types of outcomes and how the Street will perceive the events with a great deal of accuracy, so I would not spend my time trying to pinpoint exact support and resistance zones.  You may find it easiest to focus on trades that are not dependant upon market direction and then make strategic adjustments based on movements in the market.

It is important for us to understand and realize the power of a rally that can be spurred by a very oversold market and very low interest rates.  Investors are almost being forced to place money in the stock market, because the returns are just not there with money market funds.  This is one the reasons that lower interest can help stock prices increase.   Additionally, positive news on the War front could trigger massive buying that would also take us higher.  We saw this happen in the Gulf War.  However, we will eventually have to deal with the failing fundamentals of many U.S. corporations.  The earnings are just not there to sustain higher prices and the outlooks that many managements of predominant companies seem to get worse as each day passes.  Although I’d love to see the averages take off and make some all time highs in a short period of time, we have to face the facts and deal with reality.      

The economic calendar is relatively sparse this week. A few important numbers will be announced including the Wholesale Inventory report on Wednesday and the PPI on Friday, as well as the Consumer Sentiment report.  The PPI will be very important, because there has already been chatter about inflation becoming a problem with rates so low.  Any signs of inflation ticking higher and this could become a problem for the market.  I do not foresee this happening, but it is something to monitor in these interesting times.     

Corporate earnings will also have an impact on market direction this week, along with any other unexpected news from companies.  Tuesday is going to be a big day for the technology sector with Motorola (MOT), Lam Research (LRCX), and Rational Software (RATL) reporting.  We will also hear from Apollo Group (APOL), Pepsi Bottling (PBG), Harley-Davidson (HDI), and International Speedway (ISCB) on Tuesday.  Winn-Dixie (WIN), Willamette (WLL), Sun Trust Bank (STI), Abbott Labs (ABT), Yahoo (YHOO), and Pepsi Co (PEP) will be reporting on Wednesday.  General Electric (GE) and Juniper (JNPR) will be the big companies releasing earnings on Thursday.  

It is important for all of us to realize that there is inherently more risk in the stock market than there was a month ago.  It is more risky to hold individual stocks than in the past and we must act on this notion.  The great thing about being an option trader is that we can combat this increased risk and make it work for us and not against us.  Focus on your risk profiles and try to make them more attractive with every passing day. Your goal is to create trades that have virtually no risk!  

Good Luck!


Phillip Wiegand
Senior Writer & Trading Strategist
Optionetics.com ~ Your Options Education Site
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