MarketWatch options expert 'calls' on Sears

In The MarketWatch Options Trader, David Nassar takes a look at the Fed's recent actions, the outlook for the overall stock market and an options play on Sears Holdings (NASDAQ: SHLD).

He explains, "The Fed's infusion of liquidity seems to have turned the tide in favor of the bulls -- at least for now. However, lest one think that everything is 'go,' it is useful to note that 'V' bottoms in the broad market are very rare. "

Rather, he notes, it is much more typical for the first rally (i.e., the one we're having now) to eventually give way to another decline. Nassar states, "If that decline does not fall below the previous lows, then a bullish pattern can arise. This is the pattern of nearly every bottom in the last 20 years."

Therefore, he suggests, "While we respect the strength of the rally and realize that more Fed moves could result in higher prices short-term, we still think there is a reasonable chance that the closing Standard & Poor's 500 Index lows at 1407 or the intraday lows at 1370 will be retested sometime in the next few weeks."

Time-wise, he suggests, "Occasionally, these retests take longer (at the 2002 bottom, for example, the initial lows in July were retested in October -- and then again the following March). In between, strong rallies can erupt, but eventually it is the retesting mechanism that delineates the true bottom."

In the meantime, he sees upside potential in Sears Holding. He explains, "The stock has tentatively completed a bottoming formation, when it broke out over 140 yesterday."

For those familiar with options trading, he concludes, "While options are pretty expensive here, and earnings are due on August 30, we think this is reasonable speculation." The trading expert recommends the Sears Holding October 140 calls at a price of $10.80 or less. If bought, he counsels, stop yourself out on a close below $133.

Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.