Response:   I would wait a touch longer before jumping into the bear call spreads, if at all.   For the RUT, it would be wise to set our short call at 650 or higher, which is the Jan high.  It’s pretty easy to get burned on the top spreads…so we need to be careful. 

Question:  But it’s interesting to notice with today’s market that even though the DOW is up almost 200 points, NASDAQ 30+ point, and S&P 500 is up 16+, the Call options on these indexes aren’t moving up much.   Why isn’t there much premium on these call options?

Response:    A lot of it comes down to supply and demand and currently there are few speculators that want to buy calls on the major indexes, and rightly so since we might still be in a correction, so the premiums that they are willing to pay are low.   Premiums are low anyway for OTM calls, especially when we’re down to the last 10 days of trade or less before expiration.    We know that  it’s difficult to push a boulder uphill and if we ‘re able to move it, it will move slowly;  however, if we let go it will start to roll down the hill quickly and momentum will build as gravity takes over.   Because the stock market is similar to a boulder on a hill,  we can charge the speculators more for Puts because there is more potential to make money on them if the market has a correction, versus the lower premiums that we are able to charge for the Calls.

We’ll watch the market daily to see if we still might have the opportunity to open our November bear call spreads.  If we do, we’ll send out new strike prices since our current  strike prices are no longer valid.   Unfortunately, because of how the market is behaving we might not have an opportunity to open our bear call spreads this month.  We’ll keep you posted.

back to just below its upward sloping channel and its 50 day SMA, and with today’s rally it’s back above the 50 day line and has moved back inside the channel.  This also is bullish and is demonstrating strength.    The RUT, on the other hand, overreacted and dropped below its upward sloping channel and its 50 day SMA, but it did, so far, hold above its 100 day SMA near 565.   With the DOW showing considerable strength, and the S&P 500 index successfully back inside its channel and above its 50 day line, there is a good chance that the small cap investors will want to “catch up” and possibly take this big pull-back in the RUT as a buying opportunity.   We believe that the RUT will meander upward over the next few days giving us a better opportunity to open our top November bear call spreads.   Therefore, let’s be patient and wait a few more days.  The bear call spread strike prices that we show in Sunday’s advisory are no longer valid and we’ll have to reset them in the next few days.   And per the bottom bull put spread, we most likely will wait until after the employment numbers come out next Friday.

Here are the events over the next week that could move the markets and that we need to monitor:

1) Earnings  -  However, half of the S&P 500 earnings are already in, 80% have met or exceeded expectations, about 60% exceeded top-line revenue growth expectations, which is good, but investors are not impressed.  Therefore, earnings information is already priced into the market and investors are back to watching, and reacting to, economic data.

2) Chicago PMI comes out tomorrow, Friday.  So as long as this is OK, the DOW and SPY should continue to hold steady or gently climb and the RUT might climb a little faster.   Refer to Sunday’s advisory for details on the economic calendar.

3) The ISM manufacturing index comes out on Monday the 2nd and if it’s OK the market should hold steady or climb, and the RUT might/should climb a little faster to catch up to the strength that is exhibited by the DOW.

4) Unemployment comes out on Friday the 6th and most likely this number will be bad, economists are expecting the unemployment rate to hit 9.9%, and most likely it will.  When this happens, this will put a damper on the overall market and our short lived bounce rally will be over for a few weeks.  Thus, we need to open our top bear call spreads before the unemployment number comes out on Friday the 6th.  Right after this number comes out, and if we have a strong DOWN day as we are expecting, this is when we’ll start to open our bottom November bull put spreads.

As soon as we set our new options strike prices we’ll send out an email advisory to all MCTO subscribers.