Market Ready to Be Strangled

After delivering a huge relief rally that resulted in the indices gaining over 3% on a 90/90 day, that is, breath was 9:1 positive and 90% up volume, the market appears poised to see some follow-through buying.

But the power of Tuesday's rally was sufficient to turn several technical indicators bullish in the short term, most notably, the 20% decline in the VIX to 25 creates a bullish spike. The steep drop removed the premium that the VIX futures had been trading at relative to the cash index. While the futures are not at a discount, the evaporation of the premium is also a moderately bullish sign.

Given that we seem to have passed through the eye of the storm of Bear Stearns' (BSC - commentary - Cramer's Take) and the other investment banks' earnings, including this morning's numbers from Morgan Stanley (MS - commentary - Cramer's Take), the market is ready to take a breather and stay within the range for the next week. My guess is the S&P 500 (SPX) will trade between 1300 and 1380, which is a still a substantial 6% range, for the next week.

One way to play this would be to sell a strangle on the index. Since SPX options tend to be very expensive, I'd use the Spyder Trust (SPY - commentary - Cramer's Take) as the proxy for the index. I would use the quarterly options that expire on the last business day of the month, in this case, that is Monday, March 31.

Shaving a few pennies off of Tuesday's closing prices, it looks one could sell the March 131 put for about $1.50 and sell the $135 call for $1.50, or about $3 for the strangle. This gives you breakeven points at $128 and $138 on the March 31 expiration.

I don't want to cause trouble, but for those who can't find or say their brokers don't offer these quarterly options, the root is RQQ, and they are even listed on YahooFinance's option chain.

If you have had a problem finding them, you should consider switching brokers to someone like OptionsXpress (OXPS - commentary - Cramer's Take), Investools (SWIM - commentary - Cramer's Take), or other brokers that emphasize option trading.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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