CVI CVR Energy Inc

Above is what I wrote on June 30 as the S&P rebounded back above 1,320 from the June swoon to 1,260, and was still headed higher to 1,340 on July 1. That article, "Summer Pullback Over? Not So Fast," highlighted the growth concerns of a slowing economy -- before the debt ceiling drama or worries about Europe heated up as catalysts.

Using the somber June FOMC reflections of the Chairman of the most important bank in the world, Ben Bernanke, my comments foreshadowed the nasty GDP revisions we got on July 29 that I still think were the biggest catalyst for the market meltdown.

How to Invest and Trade Until We Have More Certainty

The volatile market swings of last week were a day trader's dream come true, where one could ride the momentum pushes for double-digit gains in hundreds of stocks.

As I wrote on August 5 in "How Long Will Correction Last?" I expect the market to range trade between S&P 1,150 and 1,250 through October as incoming evidence for and against a potential recession is processed by participants.

In the meantime, I don't "day trade" much (see below). Instead, I sell puts on my favorite stocks when they go on sale. For example I sold the November 60 puts on National Oilwell Varco (NOV) for $6 when the stock traded near $61. As NOV rallied hard back up to $70, and option volatility has declined, the value of those puts has fallen to nearly $3.

I may take profit soon, but either way I have no worries about a possible decline and no problem being assigned and buying a great stock at an effective price of $54 before November expiration.

I also sold Suncor (SU) Jan 30 puts for $3.40 when the stock traded near $30 last week. I loved this name at $40 in June (I sold January 2013 puts for $10, making me effectively long at $35) and even though they missed on earnings last quarter and crude oil is lower, I wouldn't mind buying more below $27 (my effective price if assigned).

I may also trade out of these puts, as I could pocket over $1 right now since they went out below $2.40 Monday.

Finally, among the bigger names I played with (I also sold puts on mid and small cap companies CVR Energy (CVI) and Basic Energy Services (BAS)), I sold the September 28 puts in Southern Copper (SCCO) for $2.00. This is my favorite copper stock next to Freeport-McMoRan Copper and Gold (FCX) because they have an abundance of reserves largely hedged above $4 and they pay a hefty dividend currently yielding over 8%.

The Sep 28 puts are trading around 90 cents today, so there's another quick profit I could pocket. But if the stock drops below the strike price of 28 and stays there to Sep expiration, I will be assigned and have an effective buy price of $26 ($28 - $2 option premium credit I received upfront = $26). Since I am betting against a severe recession that would take the good Doctor Copper below $3.50, I like owning SCCO there.

For some further back ground on how to sell naked puts for extra profit on your favorite stocks, check out either the articles or video below:

Strategic Put Selling, June 1

Naked Put Trades: How to Profit from Your Favorite Stocks: This video from July 12 highlights the mechanics of the trade I did in Cummins (CMI), a put risk/reward that has definitely withstood the test of time and volatility.

Sell-Off Volatility Offers Opportunity: This article explains the rationale of selling puts when stocks are down by showing charts of how option volatility works. Day Trader's Cauldron

As I said, I don't really day trade stocks, but if I did, last week held some of the greatest opportunities. (I used to day trade currencies on a high-volume spot-futures arbitrage desk, where I made markets for some of the biggest banks and funds in all time zones. Glad I don't do that anymore because that kind of stress will eat you alive.)

The guys and gals who do day trade stocks made a killing last week. Here's what I did do that nearly tempted me to be like them:

I bought 300 shares of the Direxion Small Cap Bull 3x ETF (TNA) just below $41 on Tuesday when the S&P seemed to find some rebound strength above 1,120. Suffering a nasty mid-morning dip to $35 as the S&P fell to 1,101, we watched a fantastic reversal unfold as the broad index marched up to 1,170 and TNA climbed up above $45.

Then the next three days were the same roller coaster of hope and despair and opportunity as the S&P tested the support level at 1,120 and the resistance level near 1,170, finally closing the week near the latter.

Like most investors and traders, I have to fight the urge to kick myself for not trading those swings more actively. Instead I sat tight for four days with my leveraged bullish ETF and finally took profits on Friday at $45.

Of course I could have experienced more regret Monday for not hanging on and doubling that gain, especially as my original trade rationale was that TNA would trade back up toward $50.

But I found a balance between my fear and my greed that leaves me relatively satisfied with the trade, able to trade another week, and best of all, full of good experience that adds to my market knowledge.

Yes, I only made 10% (on a $12k investment) in four days when I could have easily made three times that amount taking profits at the highs and having more courage at the lows.

But as a former high-frequency FX trader who lived eight hours a day in that world of hyper choppiness, I have come to like the equity swing trade and position trade much better than the nerve-wracking day trade.

Alright, now that we got that out of the way, let's figure out how to make money for the next two months as this market range trades around 1,200 (as predicted here on August 5 in "How Long Will Correction Last?")...

Picking Your High-Probability Spots

When stocks go on sale like they are this month, you have to be willing to dip your toe in the water. You have a couple of things in your favor that create a high-probability opportunity to profit.

I want to share with you a short-term investor-trader's perspective that can clear your head, give you courage, and make you money in both the short and long runs.

If there's a stock you wanted to buy last month and now it's trading 20% to 40% below that level, ask yourself "What does my risk/reward look like now?"

Ignoring for a moment the probability of recession that could take it even lower -- which is what this market sell-off is all about -- if you buy the stock "on sale" you put yourself in the investment position you wanted with a new margin of safety.

Then, if you get a 10% to 20% pop in a few days, you have the luxury of choosing that short-term trading gain or keeping the investment. Remember, if your stock came down 30%, say from $100 to $70, a 15% rally ($10.50) only gets you back about 1/3 of the way.

When you get these terrific volatility-driven returns in a matter of days, there is no harm in taking them. Especially since chances are we haven't seen the final bottom yet in this panic and you will get new opportunities to re-enter.

Speaking of relief rallies and why it's a high-probability bet to look for a trade up to S&P 1,250 in the next few weeks, see my article from yesterday "Who's Afraid of the Death Cross?"

Disclosure: I am long and/or am short naked puts in NOV, SU, SCCO, CVI, BAS, and CMI

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
CUMMINS INC (CMI): Free Stock Analysis Report
 
CVR ENERGY INC (CVI): Free Stock Analysis Report
 
NATL OILWELL VR (NOV): Free Stock Analysis Report
 
SOUTHERN COPPER (SCCO): Free Stock Analysis Report
 
SUNCOR ENERGY (SU): Free Stock Analysis Report
 
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