Levels of Lore?

Click charts to ENLARGE.

tags: stock market, options, investing, Black-Scholes, volatility, Fibonacci

I'm not drawing any conclusions that 1) we've hit bottom or 2) that any 'significant' rebound is more than 'reflexive'. The credit overhang may last for years and you've probably heard that the 700 billion dollar BAILOUT may be looking more like 2 TRILLION...

Here's the SPX weekly chart.

• 750ish on the down side seems like an obvious potential target (note the stochastics weekly is still pointing down)
• round number resistance at 1000 shows up first on the upside

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How about daily SPX levels?

• There's a small Fibonacci confluence at 1074
• The ten period moving average shows up at 1050, the 20 at about 1125
  
• There's a Fibonacci retrace at about 1020
• The round number 1000 becomes the first battleground
  

Multiple issues emerge for traders. First is the role of volatility for options traders. If the market should rally and volatility 'plunges', then calls could underperform. Paying attention to volatility could really pay off, but regardless, controlling risk will be paramount.

Here are some 'theoretical' SPX option values for now...using an online Black-Scholes calculator.
___________________________________________________If we presumed a rise to 950 over a couple of days but major volatility collapse (probably excessive), notice how the call option values FALL despite a substantial rise in the price of the underlying. Specifically, despite a 50 point rise in the SP500, the call options FALL substantially.

Adventurous funds might elect to sell out of the money calls and puts looking for volatility constriction and directional gains on one side of the spread. Selling out of the money spreads adds even more risk control.

Overall, we have many major points to consider.

1. Price, investment horizon, and investment choices
   
2. Volatility
3. Risk control.
4. "Black swans"
   

Overestimating the power of the intervention of the central authorities has only cost speculators dearly. What causes traders the most pain (the pain trade)? I think that's still DOWN.

Good trading and great risk management to all.

Educational use only. Never intended as investment advice.