Since early this month I've been waiting for the S&P 500 to approach the 1160 level so stocks could find sufficient support and a rally could ensue. Monday's late-day selloff, during which the S&P hit 1163.75, has moved various gauges toward temporarily oversold readings. This suggests the market could provide more trading rallies like the kind we saw Tuesday morning.
Options for Entries
Even though my exact target of 1160 was not achieved, it was close enough that now I'm looking for some limited-risk long entry points. In fact, many of the trades that work best, or those with a high probability of offering a profit, are those that don't allow too many people the perfect entry point. A good price turn will leave the majority of investors behind, forcing them to chase the market, which in turn helps extend the price movement. Using options instead of trading the underlying security can help you avoid situations in which you miss a trade setup due to an entry level that's too exact. Given the above preamble, the first, most obvious place to look for a trade would be in the recently listed S&P Depositary Receipts ( SPY) options; with two weeks of trading and an expiration under their belt, it's probably a good time to take those doggies for a run. Let's look at some prices and scenarios to illustrate how it is sometimes advantageous to use options for establishing a position when the price gets close to your target. On Monday, with the SPY closing at $116.55, the April $114 call settled at $4.65 per contract. Aside from the fact that buying the call costs less than buying shares in the underlying ETF ($465 per call compared with $5,827.50 for 100 SPY shares, assuming 50% margin), the amount you will have "overpaid" is minimal: There isn't much additional risk when you buy the options with the SPY a little higher than your perfect entry point.