Monday Options Thoughts: Is This the Bottom?

The stock market has been in a free fall since mid-May when the DJIA topped out at 13136 and the S&P 500 maxed out on the upside at 1440 on the same day. Recently, the market has been showing signs of bottoming. Take a look at the daily DJIA chart, a perfect Doji candle formed on Monday, 7/1/2008 then on Tuesday 7/2/2008 a candlestick formed with a long wick below seeming to indicate seller exhaustion.

Wednesday, the DJIA dropped again but quickly bounced back on the Thursday. Markets were closed on Friday due to the July 4th holiday. Today, Monday, the DJIA opened with a strong advance due to a decline in oil prices and sentiment that this week's earnings releases will not be as negative as analysts feared. The DJIA is about 1000 points below the 50-day Simple Moving Average, and about 1400 points below the 200-day Simple Moving Average. Talk about oversold!

Technically, it's a nice looking bottom pattern.

The question is, is this just a short term bounce or the start of a new uptrend? In addition, sentiment readings could not be more bearish with Schaefer Research listing Bearish Percentage at 44.7% and Bullish at 31.9% yesterday. This extreme bearish sentiment is a indication of the bottom. However, the VIX is not confirming the bottom here with high readings. In March, the VIX reached 30 plus, now the VIX is merely in the low 20's. This indicates that fear in the market hasn't reached maximum levels yet, which tends to lead one to believe that the bottom isn't in yet.

It's a tough call, but I am leaning toward the short term bottom scenario. How can one play this market bias via options in the stock market? Here are 3 bullish stock option trades that look interesting right now:

1. Yahoo (YHOO | Quote | Chart | News | PowerRating) July 22.50 calls YHQGX

Yahoo is back in play, as they say in investment banking circles, Rumors are swirling about takeovers, break ups, and mergers. In fact, Carl Icahn, just this morning, stated that Microsoft may still be interested in the company if certain changes take place. This looks like a potential opportunity to go long via options due to the situation. The YHQGX have nice open interest, and just went into the Money this morning. In addition, they appear to be nicely priced for a speculative trader to look into buying.

2. General Motors (GM | Quote | Chart | News | PowerRating) August 10 Calls GMHB

Can things get any worse for this beleaguered auto giant? Waves of negative news combined with soaring oil prices have simply beat this symbol of American auto making to its knees. The company is being forced to cut jobs and as many as 8 brands from its roster, this could easily result in an upswing in the stock price. Combined with potential topping action in oil, and severe oversold conditions on the chart, GM is potentially a good vehicle to play these ideas.

3. International Business Machine (IBM | Quote | Chart | News | PowerRating) August 130 calls IBMHF

This bellwether of the DJIA is looking impressive on the chart. It is nicely above the 200 day Simple Moving Average and approaching the 50 day Simple Moving Average at 124.41. 129.99 is the high, and the August 130 calls have nice open interest interest. I am not expecting the 130 calls to go into the money by August, however, a strong technical case can be made for continued upside in IBM here and the 130 calls should benefit.

Remember, these long call plays are highly speculative, be certain to only use risk capital.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.