The strong fall we saw in our market today put us through a key support level of roughly 5600 which provides a trading opportunity.
Analysis:
The XJO is currently trading at 5552.5.
The XJO is trading in a medium-term downtrend, characterised by lower peaks and troughs, and represented with an accelerating downtrend line (see below).
We managed to hold and bounce from 5650 support on several accounts recently and, until today we were trading in a descending triangle, waiting for the market to choose a direction.
With negative global sentiment, it shouldn’t surprise us too much that the market has chosen to continue the trend lower with a break of key support.
As traders of Options strategies, this provides an opportunity rather than just watching our portfolio devalue.
We can look at a number of bearish strategies, including something as simple as a bought Put Option. Instead, I would prefer to look at a strategy where time works in my favour because the market has a tendency to whip around and stay in trading ranges for a while. In fact, it wouldn’t surprise me if we saw the market have a brief bullish move before continuing lower.
Choosing a Bear Put allows me to have the flexibility to wait for a bearish move as time decay actually helps me profit. If set up correctly, you can profit from both a falling and sidewards market, and give yourself a bit of protection if you get the direction wrong.
The strategy:
There are many different types of options strategies used in different market conditions. But the key reasons why we would trade a Bear Put in this scenario is:
- It benefits from a falling market. Can be used as a short-term trade as the stock doesn’t need to move down much to make a profit.
- Time decay can work in our favour to generate profit form sidewards movement.
- Is a directional trade that we can get out of quickly, but gives the benefit of being able to wait for the move.