If market standouts like Google stock seem attractive, but a rickety economic outlook is holding you back, consider your options, says Harold Morris, MarketSmith senior product coach.
Stocks continue to tread water as investors sweat rising interest rates. While Fed Chair Jay Powell signaled rate hikes were unlikely in November, he reaffirmed the Fed's focus on tamping down stubbornly high inflation.
The current stock market action is reflecting these worries. "We're still not out of the woods yet," said Morris on Investor's Business Daily's "Investing with IBD" podcast.
He points to general market indicators like the Nasdaq advance/decline line. It's been on a steady downward trend since the tech-heavy index peaked in mid-July. That signals a lack of participation to the upside. "We need to see an improvement in that advance/decline line before we're anywhere close to being out of the woods," says Morris.
And when trade setups are lean, the best thing to do might be to wait. "There's really no urgency to get back into the market," says Morris. "We just wait and see."
Audio Version Of Podcast Episode
Fully Optioned Google Stock
A shifting market environment coupled with near-term uncertainty make conditions ideal for considering option trades on names like Google stock, says Morris. And it all starts with a stock's relative strength, the measure of how a stock is doing compared with its peers in the market.
Morris says he considers Google's levels of support and resistance. He also analyzes Google stock's moving averages to see if they're tightening. In Google stock's case, a bullish setup is taking shape. Shares are finding support at their 50-day and 21-day lines, which have converged.
He then creates a bull put spread trade on the stock, selecting the short put strike around Google stock's support level on the downside. Morris typically then buys a put $5 below the short put strike to create the spread trade.
What Is A Bull Put Spread?
A bull put spread is a credit spread. That means there's a net credit on the trade, with the trader pocketing a premium upfront. Creating a spread trade also helps manage risk since the trade's break-even point is predefined.
Time is another consideration for Morris. "When I'm placing an option trade, I want to be at least 45 to 60 days out just to give that option a chance to work," he said.
An option with a longer time frame gives a trader more trading days for the position to work out. But a longer time frame also increases volatility, since more can happen between when the call is made vs. when it expires. Morris says one solution is to "roll" the contracts to move the expiration out even further. "Give yourself the gift of time," he said.
Check out this week's podcast episode for more investing insights.
