What Possible Trading Strategies Fit The Current Bullish Sentiment?

The Banks (KRE) and Financials (XLF) were the clear winners today with the metals (GLD) and the dollar (UUP) the losers. I don’t know if I am a firm believer in the V-shaped recovery but I am impressed with how the market held up today.

With this type of upswing, I have been asked, what possible strategies fit this trading environment?

Consider bullish verticals. The components of the bull vertical spread is buying the In-The-Money call and selling the Out-of-The-Money call. For those of you that are a little more seasoned you could possibly look to sell the At-The-Money puts and buy Out-of-The-Money puts for a net credit. These strategies fit a bullish sentiment in a high market volatility environment.

There are quite a few economic numbers that could impact market trading Tuesday- 8:30 ET Durable Goods Orders for Feb, 8:30 ET Durables, Ex-Transportation for Feb, 10:00 ET New Home Sales for Feb, 10:30 ET Crude Inventories for 03/20.

After Hours

Stocks soared Monday on hopes government plans to buy back soured bank debt fueled optimism that credit might start flowing again. The global economy might be revived. Financials led the Dow Jones Industrial Average (^DJI). Citi (C) gained 19.5 percent, BofA (BAC) rallied 26 percent, and JP Morgan (JPM) jumped 24.7 percent. The advance wasn’t limited to the financials, however. All thirty Dow stocks moved higher and the industrial average gained 498 points. The NASDAQ (^IXIC) added almost 100. The S&P 500 (^GSPC) gained 54.4 and moved back above 800 to close at 822.9. Although Monday’s move was to the upside, trading remains volatile and for that reason, perhaps, the CBOE Volatility Index (^VIX) slipped just 2.66 to 43.23. After hitting a low near 39 last week, VIX is back towards the middle of its recent range. Trading in the options market was active, with approximately 10.4 million calls and 7.2 million puts traded.

Bullish

Las Vegas Sands (LVS) gained 24 cents to $2.65 and options volume rose to 3 times the typical levels Monday. 45,000 calls and 1,400 puts traded. April 5 calls saw the most volume and late day trades included several blocks across multiple exchanges at the offer for a dime. It appeared to be a substantial call buy. However, total volume in the April 5s reached more than 36,000 contracts and some of the volume was likely call writing, as the contract is 88.7 percent out-of-the-money with 24 days left until expiration. Bullish trading was also seen in Illumina (ILMN), BMC Software (BMC), and Red Hat (RHT).

Bearish

H&R Block (HRB) didn’t participate in Monday’s rally. Shares fell $1.75 to $17.38 after the tax preparation company said total returns prepared through March 15 fell 3.2 percent from the prior year. In the options market, trading turned defensive. 12,000 HRB puts and 1,740 calls traded. Increasing buying interest was seen in April 17.5 and 15 puts. More than 9,000 traded on the session. Bearish trading also surfaced in Advanced Micro (ADM), Hatteras Financial (HTS), and Plexus (PLXS).

Index Trading

ISE Regional Bank Index (^JLO) finished up 2.12 to 15.06 on hopes the government’s plans to buy back bad debt will help the ailing banking industry. In the options market, April 15 calls saw active trading early after 8,175 contracts hit near the bid for 80 cents Monday morning. The bid-ask was 75 cents to $1.05 at the time. Therefore, the trade appears to be an opening call write. If so, the strategist might be writing calls on the index based on the view that a Monday’s gains won’t hold. Outside of that, the S&P 500, the CBOE Volatility Index, and the Russell 2000 (^RUT) had among the more actively traded contracts. Approximately 557,000 puts and 590,000 calls traded across all index products.

ETF Trading

SPDR Retailer Trust (XRT) finished up $1.38 to $$22.71, but sentiment in the options seemed cautious after one strategist appeared to have bought a substantial bear put spread on the exchange-traded fund: buying 8,400 September 20 puts for $2.27 and selling 8,400 September 15 puts for 72 cents. If so, the strategist paid $1.55. The potential pay-off is $3.45 (excluding commissions) if retailers give up recent gains and XRT closes at $15 or less at the September options expiration. Beyond that, the PowerShares QQQ (QQQQ), the SPDR Trust (SPY), and the iShares Emerging Markets Fund (EEM) had among the most actively-traded securities. Trading was active. Approximately 2.4 million puts and 2.8 million calls traded across all exchange traded funds.

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