Index Option Trader

Archive: October 2007 Trade Commentary - Oct 11, 2007

Just as I was writing this commentary for the October SPX and SPY trade, the news came across my wire that European Central Bank governing council member Axel Weber said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control. As the news was coming across, I was writing about how the SPX was breaking out to the upside above its previous swing highs at the 1556 levels. This technical move known as a breakout, signaled that the SPX (and SPY) were, in effect, heading higher. When planning our spread for this month, we took into account the markets neutral to bullish sentiment and expected the SPX index price to move sideways to up around the 1570 to possibly the 1580 level by expiration, if bullish attitudes remained intact. We also took into account the fact that earning season was going to kick off about a week outside of expiration and if the Dow components put in solid Q3 numbers, we would be in for a move to the upside. Also weighing on the markets is the fleeting fact that another rate cut on Oct. 31 is going to happen. Overall, our October trade remains intact with the SPX at 1554.41, right near the middle of our range, which is excellent. Today’s market sell off could be seen as a gross market overreaction, but only the markets will tell the story.