The S&P 500 has climbed some 3.5% over the last three weeks, and finally seems ready to break out of its five-month-long trading range.But just as the decline to 1160 did not set off an extended downtrend or bear market, this recent rally appears likely to stall before reaching new highs and igniting a new bull market. For now, we may be preparing to settle back into a narrow trading range for the next few weeks as market participants catch their breath, reassess the energy and inflation situation, or simply take some time off until after Thanksgiving. With earnings, the Federal Reserve meeting and Tuesday's official introduction of Ben Bernanke behind us, there appear to be few catalysts to drive the market meaningfully in either direction. Stocks will probably probe the high end of the range and experience some knee-jerk, though relatively shallow, selloffs as the S&P 500 approaches the old 1245 high. I'd expect the S&P 500 to trade within the bounds of support of 1210 and resistance at 1245, a 2.5% range, for the next two to three weeks.
I'd strongly encourage the use of limit orders on these, in this case using both pieces together rather then legging in when trying to establish a position. If you don't get filled at your price, forget about it.
But if the market is able to calm down, consolidate over the next two weeks and still trade between 1220 and 1240 as of Dec. 1, or two weeks from today, you can expect time decay to bring the 1220/1250 strangle's value down from $18 to approximately $10 during those 14 trading days. That's a 44% reduction in value, which translates into a 28% return on investment (standard margin rules applied). If this type of profit is available at that time, I would suggest closing out the position. Trying to carry a naked option position all the way to expiration increases the risk, without a commensurate increase in the potential reward.