• What is your outlook?
• What about you?
• Where to start?

First, decide your outlook on the market. Is it rising, flat or falling? The market indices tend to range, just like stocks do. Whether rising, falling or in a classic horizontal channel, the market tends to have upper and lower trend lines. Where is the market in regard to those trend lines?

Look at the market on both a daily and weekly chart. A daily chart might be writable, but the market could be topping out on a weekly chart - and this is trouble. We won't always be right, but you have to start somewhere. Would you really want to write a covered call when the market is plummeting? No. It would be even worse if you didn't know what the market is doing.

It is also a good idea to use our Research Page (the Ind. Rank link) to see which industries have been performing well for the week, month and quarter. I make a note of these.

1. Market Coming off Support

Is the market rising in its channel after a successful test of support? This happens in two situations:

1. An uptrending or flat market has just tested support on volume and is rising, and

2. A downtrending market has just tested support on heavy volume - perhaps on a weekly chart - and is rising. It is indeed possible to write calls in a bear market, and this is the time to do it.

The heavier the volume on the test of support, the more likely it is that the shorts and weak players have been cleared out or are clearing out. Traders love a rising star, and this is a great setup. The uptrending market's pullback to test support is known as a bull flag, and a bull flag on volume is a classic signal for traders to get long.

Covered Calls: Deeply ITM calls work well, obviously, if you are conservative. ATM calls work well and produce a higher return. OTM calls really shine in this environment, and it is - really - the only time we should write them if our goal is truly high-probability trades. Naked Puts: I'm a believer in OTM puts in just about every writable environment. An OTM or ITM put can be written, but only If you are quite bullish on the stock in the short term (through expiration) and willing - nay, eager - to own it. SuperPuts: I tend to buy an OTM put and sell an OTM call. I want the higher upside of an OTM call here and will accept less put protection. An alternative technique is to buy a cheap ITM put and wait to write the call until the stock has risen and you can write a call with a strike price higher than the put strike.

A downtrending market's rise to test resistance (the top trend line) is known as a bear flag. This is a trade entry point for covered writers, because in a bear market it offers the best odds for a good trade. I will sometimes write OTM calls in this environment, but usually stick to ATM calls.

2. Middle of the Range                                                                                        

Is the market getting to the midpoint of its range? Note that it is usually possible to draw an internal trend line in the middle of the trend. It may not be exactly in the middle, but it will be a level where the market or stock tends to stall out on advances and sometimes act as support after the market has topped out.

When the stock is in the middle of its range, we really don't know if it will continue up, or stall out and look for the lower trend line again. This is not a bad time for a covered call or naked put, but less bullishness is warranted than when the stock has just bottomed at supporty on strong volume.

Covered Calls: Stick with ITM calls on stocks that are 1) performing better than the market, and 2) not themselves also getting toppy. Naked Puts: Stick with the same galaxy of stocks and consider only deeply OTM puts, unless you really want the stock badly.

3. Toppy Market

Is the market at or getting close to resistance? In other words, is the market approaching the top of its trading range (upper trend line) or nearing a resistance level? I am unlikely to have a bullish outlook in this case, even for a stock that is outperforming the market. I like to put as many odds as possible in my favor, and a market hitting the ceiling is not helpful. When using a covered call strategy, I never, ever gamble on the market or stock breaking through resistance. If you don't have an unlimited upside, why accept higher odds of a failure at resistance?

Covered Calls: In a toppy market scenario, I either stay out of the market or stick with deeply ITM calls on stocks that are 1) performing better than the market, and 2) not themselves also getting toppy. Naked Puts: Stick with the same galaxy of stocks and consider only deeply OTM puts, unless you really want the stock badly.

Needless to say, this applies even more strongly to a market already pulling back from resistance. Who wants to buy a declining asset?

4. The Brief Pullback

An uptrending or flat market frequently will pull back for several days. This often happens at or just following a pivot point - a recent high or touch of the upper trend line. Unless you are concerned about the integrity of the market (you fear it could go over the cliff), this can be an opportunity. It seems counter-intuitive, but when the stock is pulling back with the market briefly - and it could just be one day - can be a great time to put on a trade. We rely on the market to snap back.

Covered Calls: I treat it pretty much the same as #1 - coming off of support. Naked Puts: I treat it pretty much the same as #1 - coming off of support. SuperPuts: I treat it pretty much the same as #1 - coming off of support. However, I am less bullish than in a #1.

Obviously, a #4 pullback does not include the scenario in which the market is selling off, as it did in October and November 2008.

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This by no means exhausts the possibilities. I'm just covering some of the major market scenarios and how I approach them. If the stock is white hot, like Research in Motion (RIMM) in 2007, of course that affects my thinking on constructing the trade, even if the market is blasè or worse.

Even when I am writing a stock OTM (as opposed to ITM or ATM), I am conservative. The reason is that I will not write OTM unless several things are lined up propitiously: the stock is coming hard off hard-fought support and I am very short-term bullish, it is a great company I'm willing to own and it appears that neither earnings nor other important news is due before expiration, etc. To the extent possible, I stack all the odds in my favor before writing. ITM writing may be more conservative yet in the same circumstances, but my OTM writing remains nonetheless conservative.

Now to business: are you looking for a covered call, naked put or SuperPut trade? Market conditions, discussed above, may influence your choice of weapon. If for example you are neutral or a little nervous about the market or stock, a SuperPut may be in order for peace of mind.

If you're short-term bullish and hope to capitalize on the stock's anticipated movement, you should look at an OTM covered call. If you just want to cream the stock for premium and are quite happy be put the stock, then a naked put could be in order. If you can write naked puts on margin, they can be even more profitable.

Your natural inclination also is important. Some can tolerate more risk than others. The market does not always provide a great environment for writing OTM calls, so we have to take it when we can get it. Some will always settle for less return as a trade-off for more downside protection. If the thought of writing an OTM call gives you hives, you know where you stand.

If you are just durned conservative, you may prefer to write deeply ITM calls or deploy the SuperPut, as a matter of course. The returns will not be large as writing ATM calls, but ITM writers would argue that the greater protection and (at least statistically) higher likelihood of being called out make it all worthwhile.

Not only your outlook on the market is to be considered, but your own predilections. If you select strategies that are too "fast" for your inner child, you will white-knuckle the position. And if you choose a "slow" strategy that you liken to watching ice melt, your animal spirits will be bored.

I can help you figure out strategies and charts, buy you've got to figure out you.

Which list to open? I often start with the Global Select (Dividends) List, my overall favorite. The reason is that I don't have to do much in the way of fundamental research on these companies. However, I do check for earnings.

Short-Term Bullish

If the environment warrants an OTM covered call write, you can of course put on an ATM or ITM write, which are slightly or much more conservative. The same is true of naked puts - we are more confident in writing ATM and ITM puts. However, one of the joys of covered call writing is to knock one out of the park, and they aren't offered every day.

• Global Select (Dividends) OTM Covered Calls • Deep Out of the Money (OTM) Covered Calls • High Volatility and Pharma-Related ITM/OTM Covered Calls (write OTM) • ATM Naked Puts, ITM if you're feeling lucky, punk • OTM SuperPuts - write ATM or OTM calls

There is nothing wrong with the Indices and All-Markets lists, but they do not feature OTM call writes except very occasionally.

Neutral

Neutral means that you have no reason to be bullish, but are not fearful. This typically is the case when the market is rather flattish and not trading in a very large range. Not being bullish, there is no justification for writing OTM calls. Thus you would write ATM or ITM calls. However, nothing ranges forever, so your outlook on what the market likely will do if it breaks out of the range should govern your choice of strategy.

• ITM Covered Calls - any except Low Volume • ATM Covered Calls - prefer Global Select and Indices, All-Markets are OK • High Volatility and Pharma-Related ITM/OTM Covered Calls (write ITM) • OTM or Deep OTM Naked Puts • ATM or OTM SuperPuts - write ATM calls

Conservative

If you are neutral or a bit nervous about the market, or just conservative by nature, then you may prefer to use a SuperPut or write an ITM call.

• Global Select (Dividends) ITM Covered Calls • Deep In of the Money (ITM) Covered Calls • High Volatility and Pharma-Related ITM/OTM Covered Calls (write ITM) • Deep OTM Naked Puts

Short-Term Bearish

If you are neutral or a bit nervous about the market, then you may prefer to use a SuperPut or write an ITM call. This is not the best outlook to have when writing covered calls, but if you do write, be very cautious. Stay with the best companies and maximum protection.

• Global Select (Dividends) ITM Covered Calls • High Volatility and Pharma-Related ITM/OTM Covered Calls (write ITM) • ATM SuperPuts - write ATM calls • Deep OTM Naked Puts, if you must

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I never use the Low-Volume lists, since I stick to quality stocks with high liquidity. While some Low-Volume stocks can be great, there is always something better.

What if the market is blah or struggling, but the stock is quite strong? There is no arguing with a stock under strong accumulation. If this is the case, I treat the stock as a neutral situation. If the stock has tested support successfully on strong volume, I may go OTM.

There is no way to cover the waterfront on this page, but this simple approach will get you going and keep you straight.

Good luck and good trading!