HOT TRADING STRATEGIES FOR A COLD MARKET
Daily Stock Market Equity and Options Trading Commentary

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Tuesday, December 30, 2008

Light Volume, Dead Options...

With the terrible year (for most) coming to an end most traders/investors have taken all the losses they want/need to realize for the year, not to mention the Christmas and New Years Holidays... Therefore volume is extremely light, which makes for the options market to be even lighter. It has been tough to find anyone to trade options with me. So I had to look a bit harder and go with a "semi-boring" trade today. Today I sold 10 PUT contracts on Merrill Lynch for the 5 January strike for $30 a contract. Friday the stock should be fully converted to BAC (Bank of America) and I don't think we'll see BAC at $5.81 (which is equivalent to MER at $5, ratio is .8595) within 18 days, one reason being investors might buy into certainty, because the MER/BAC deal is officially closed etc... Worst case scenario is that the stock gets to or goes below $5.81 and I purchase the shares for $5.81, I don't have a problem (unless of course more banks get nationalized which is a scary thought but still very possible). I will then just write out of the money calls on the newly purchased shares until eventually I get called out. The other side is that the stock is not below $5.81 on that third Saturday in January, I will then have made a $300 (minus commissions) profit. I guess that's not too bad considering how light the volume is. The way I look at is: I want the 1000 shares of Merrill and I am getting paid to place the limit order for 5. This way I might get my shares at what I set the limit a, but I might not get them but get to keep $300 for free... If there is a stock you've been looking at, and you think the limit you want to place is just way too low, you might want to sell the PUT contract and have a shot at that price and get paid for doing so...


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