I received a comment on the Death Cross trade that I talked about last week. I will get to that in a moment.

As for last week’s commentary, the technicians version of the death cross proved to be fallible. At least over the short term!

A couple of points to consider before changing focus. The first reflects my position that up until last week, investors were focusing on macro events. The global economic picture does not look particularly appealing and it was those fundamentals that produced the technicians version of the “death cross.”

What happened last week was a clear shift away from macro events and onto the upcoming earnings season. Things on that front look pretty good, as most traders are looking for upside earnings surprises.

Over the next month or so, the earnings focus may be enough to take the markets to the top of their trading range. I doubt it takes us much beyond that.

Now to the comment. Richard tells us that he sold all of his positions on June 29th, but likes to trade bear markets. He talked about writing naked calls. But his concern was that volatility tends to abate when markets are rising, which reduces the potential income from a naked call.

He wanted to know whether there is an option play that I preferred to use in bear markets. To begin, the naked call is not a strategy I like, because I believe there is too much potential risk. My preference is bear call spreads.

There are two reasons for this: 1) a spread limits my risk and 2) because a spread involves the purchase and sale of options on the same underlying security, it effectively removes volatility from the decision making process.

With volatility eliminated, I can focus on the direction of the underlying security. If I am right in my timing of the entry point, the bear call spread will be profitable. If I am wrong, as seems to be case from last week, I have limited my risk.