Good Trading Opportunities May Be Here

Stocks looked to settle moderately higher, as the rotation from energy/ag infrastructure continues to rebalance the market. I still think that it will take the S&P 500 closing above 1295 before this bear market downtrend I broken. But in the meantime, we should get some good trading opportunities, as investors try to suss out whether the seesaw between financials and energy is ready to have enough up and down swing.

A reader asked for a specific example regarding my previous comments about looking at strangles in the financial sector. So let's go to Bank America (BAC - commentary - Cramer's Take)

With BAC trading at $33.50, one can sell the August 30 put for $1.10 and sell the August 35 call for $1.60 a contract. That's a net credit of $2.70 for the strangle. It gives you breakeven points $27.30 and $37.50, or a nearly 30% range over the next three weeks.

If the stock closed above $30 and below $35 on the on the Aug. 15 date, then you collect the $2.70 premium, or about an 8% return. My belief is that after this incredibly volatile period, these banks, the big ones such as BAC in particular, will be due for a period of consolidation. Selling a strangle will benefit from time decay and the decline in implied volatility.

And remember, there is no need to hold the position until expiration. My guesstimate that if shares of BAC are still around $33 next Friday and implied volatility drops from its current level of 70% level to even an elevated 55%, which is still the high end of the 52-week range, the value of the strangle will have contracted to about $1.50, or a 44% gain in just over a week.

Of course, you'll be sitting on pins and needles during this time, but isn't that part of the fun of doing what we do?

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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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