Key Levels For The Major Indices

Much has been made about the Dow Jones Industrial Average (DJIA) touching the key 7,500 level this week. Why is this level considered important from a historical and technical basis? And what are the other major indices, such as the S&P 500 Index (SPX), NASDAQ 100 Index (NDX), and NASDAQ Composite Index (COMP) showing on a long-term basis?

As you can see in the following chart, this area on DJIA marks the previous lows from November 2008 and 2002-2003 and was also an important technical level in 1997-1998, so it can be considered a strong support level. As you can see the following chart, if we do break sharply below 7,500, we are basically going back to mid-1990s levels in the Index.

The S&P 500 Index (SPX) has breached the 800 level which was significant in the past, but the 750 area is perhaps more important, and we have not yet touched that level this month. We are currently about 5% above that level.

The NASDAQ 100 Index tracks the performance of the biggest NASDAQ stocks -- this Index almost touched the key 1000 level in November 2008, but currently is about 15% above that level, due to the recent general outperformance of NASDAQ stocks. Some of this is due to the lack of Financial and Energy weighting in NASDAQ Indices.

The NASDAQ Composite encompasses almost 3,000 NASDAQ listed stocks. The COMP is the Index that famously hit 5,000 in March 2000 at the height of the parabolic uptrend now known as the "Internet Bubble". This Index bottomed around 1,100 in 2002/2003, and thus far we have remained above that level, both currently and in the November 2008 plunge. We currently stand about 25% above 1,100 on the COMP.

The bottom line is that we are dangerously close to making 12 year+ lows on two of the most widely followed indices, the DJIA and the SPX. However, we do we established support around and just below the current levels which one would anticipate is likely to hold (at least for a trading range consolidation). The NASDAQ indices have withstood the 2008/2009 drop much better ... but from the bearish perspective, they indicate a potential 15% to 25% more downside to their key levels. Of course, these are very long-term charts -- within the big picture multi-year trends are many short-term great trading opportunities on both sides of the market for option traders.

Moby Waller,
BigTrends Portfolio Manager & Analyst

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Introducing Options Strategy ? Vertical Spread

There are more than 20 options strategies can be applied, but one of my favorite is Vertical Spread. The meaning of vertical spread is that you purchase and sell options of the same type (same stock symbol) with same expiration date but with the different strike price.

In Vertical spread, you can choose to apply bull put spread, bear call spread, bull call spread and bear put spread. Bull put spread or bull call spread can be applied when you think that the stock is bullish, that's what the bull word imply. And if you think the market is bearish, use the otherwise strategies (bear call spread and bear put spread) which have the bear word in it.

When the option sold is more expensive than the options bought, there is a net credit, this strategy call vertical credit spread. Both Bull put spread and Bear call spread are credit spread. Therefore, without fail you have the money in your pocket immediately after the button click on screen.

The benefit of using Vertical Credit Spread is that you can limit your loss due to the spread. Take an example, if your spread difference is $5, your limiting lost will be $500 (every option contract = 100 stock, therefore multiply by 100). The smaller the spread, the better chance to win as you minimize your risk.

My preferred strategy is using 2.5 spread, for example, sell/buy a pair of options strike price of 25 and 22.5, the difference is the spread which is 2.5 in this example.

On the other hand, selling a spread is normally better than buying a spread. Becoming the seller makes you have the advantage of the time value of the options. As you know that when option price is decreasing when close to the expired date, like a water fall pattern, time is on your side.

For an example, if you are selling QQQQ strike price 45 and buying the strike price 43, you have 2 dollar spread. Selling $0.8 option of the strike price 45 and buying at $0.3 option at 43 strike price make you have the credit of $0.5. If QQQQ hovers above 45 until the expiry date, you earn the credit of $50 ($0.5 x 100) by letting both of the options becoming worthless.

Nevertheless, set the stop loss at the level of the sold option minus the credit earn, if you use the above example, the stop loss should be at 44.5. Never allow the stock price drop further than the stop loss target, if it does, buy back the sold leg and let the bought leg run.
If you really want to play safe, cut the loss and close the position when the stop loss is triggered.

Doesn?t it sounds too simple to be truth? Find out more from options trading Academy.

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