Betting on a Bounce

When the S&P500 opened lower this morning I noticed that it was about 40 points below it's 10 day EMA. Extreme divergence(more than 30 points) from the 10 day EMA is usually a good indicator of heavily oversold(or overbought) conditions and usually leads to a short term reversal. The S&P reversed and went positive before I got into the trade. The reversal didn't hold though and the S&P dropped down near 1180(which was actually a critical support level according to one analyst I subscribe too). At 1180, it was around 50 points from it's MA and I managed to get into a trade within a few points of that.

• Sell to Open: 1 SSO Nov 25 2011 40.0 Put @ $0.44

When trading around the 10 day MA, buying options can be very profitable, but often times the bounce isn't enough to make up for combination of loss of time value and the loss of volatility as the market stops dropping. I'll usually just buy leveraged ETFs instead, even though the cash and margin requirements for holding ETF shares is quite large. It's a much safer trade than trying to time long options correctly(which I've never been very good at anyway). I don't always like to short options on the ETFs either because of huge margin requirements and timing/risk issues. Since they've started offering weekly options on most of the leveraged index ETFs though, the timing is less of an issue for me on short options.

The Numbers

• Cash: +$44
• Short Option: -$44
• Margin: +$2,380