Market Overview

Options Traders Should Be Wary Of Geopolitical Risk

Options Traders Should Be Wary Of Geopolitical Risk


Last week was another one in which early promise turned into an ugly close. Understanding the "why" of the sell off is crucial to guide trading going forward.

Thursday's drop appeared to reflect rate hike fears, evidenced by a spiking TNX. However, Friday the TNX crashed, indicating a different driver of selling -- likely geopolitical worries. If that analysis is correct, then every day without new nasty geopolitical headlines will allow bulls to recover from last week's drubbing.

A few good notes from last week:

  • Small caps led the bounce Friday, closed far off the day's low and didn't underperform the broader markets.
  • Earnings are decent, and IPOs are still winners.
  • Some momentum (perceived froth) stocks are catching bids like Tesla (NASDAQ: TSLA) and LinkedIn (NYSE: LNKD), so risk appetite is not dead.

Related Link: Weekly Options Preview: 4 Factors To Watch And 5 Trading Ideas

Revisiting trends:

  • Small caps had a fourth red week in a row. Markets may start chattering of a possible head and shoulder pattern, foretelling lower prices. However, the stocks may need a new negative catalyst to drop significantly.

  • The rising wedge trend in the S&P has now broken:

  • The NASDAQ held up best, staying inside the trend. It is vulnerable because Apple (NASDAQ: AAPL) couldn't break the 100 mark. Possible trades include shorting Intel (NASDAQ: INTC) and/or Microsoft (NASDAQ: MSFT), via debit put spreads where risk is defined and the reward can be plentiful.

Variables to watch, beyond the usual worry over Asian financial debacles and/or another unforeseen shoe to drop:

  • Gaza: The longer it takes, the messier the outcome for everyone involved.
  • Ukraine: Messy.
  • Fed/Yellen: So far, markets don't know what to watch for signs of rate-tightening triggers.
  • Earnings: Somehow companies are managing their P&Ls and stock prices. Consider using the trader reaction to gauge sentiment and adjust your micro trades off your macro thesis.

Trade Ideas For the Week:

  • Absent headlines, traders can cautiously seek new longs.
  • Consider avoiding earnings plays.
  • Traders can try to pick a few Giraffes to snipe, such as extended names like Intel and Microsoft (if it loses the 42 level), or consider shorts in stocks like in Equinix (NASDAQ: EQIX) and GoPro (NASDAQ: GPRO). Again, debit put spreads enable defined risk levels and time, and allow room for error.
  • Traders can also consider a few credit put spreads in strong tickers.
  • Too long? Consider a hedge. Too short? Think about booking some profits, even if money's left on the table.

Check out the video below for a recap of this week's options outlook:

Tags: Gaza geopolitical risk Janet Yellen

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