Option Investor

Daily Newsletter, Tuesday, 10/21/2008

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Table of Contents

  1. Market Wrap
  2. The Contrarian
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Earnings In Sharp Focus

Investors turned their attention away from the months of financial crisis and towards the earnings cycle for Q3. What they saw was another crisis of confidence as company after company missed already lowered estimates and provided bleak forecasts. Tech stocks led the broader indexes lower but the negativity was slowly spreading across all sectors.

Wilshire 5000 Chart - 120 Min

The economic headliner for the day was the Chicago Fed National Activity Index or CFNAI. The headline number fell to -2.57 and a new 26-year low. The three-month moving average fell to -1.78 and a level consistent with a recession. This was a 17-year low. The average has fallen to -0.7 or below seven times since 1967 and six times the country was in a recession. The drop in the CFNAI was largely due to the biggest decline in industrial production since 1974. A total of 64 indicators out of the 85 that make up the index posted declines in September.


The weekly Chain Store Sales report posted a drop of -1.6% and erased the gains over the prior two weeks. Year over year growth slipped to only +0.9% and the lowest level since May. This was the largest drop in five weeks. The drop in gasoline sales has not yet prompted a resurgence of consumer buying in other areas. The bounce we saw from the tax rebates has faded and consumers are showing the stress of running out of money before they ran out of month. Weakening consumer confidence, now at 28-year lows, is weighing on consumer spending. Consumers are hoarding what little cash they have with the holidays just around the corner.

In the Regional and State Employment report we saw employment fall in 41 states and the District of Columbia. Regional employment fell sharply with several states showing unemployment over 7%. For instance California's 7.7% unemployment is a direct result of the severe housing correction. According to Moody's 27 states are already in a recession and those states account for 63% of the national job market. Unemployment in New York is expected to rise sharply as massive layoffs in the financial sector create another wave of job losses in the service sector.


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The Fed announced yet another bailout program worth $600 billion to support money market firms. Those firms are currently seeing an outflow of funds because of fears the funds investments in corporate bonds and commercial paper will default and leave the funds with less than $1 for every $1 on deposit. This is called breaking the buck. Money funds have always loosely guaranteed that every dollar parked in their fund would always return a dollar and hopefully a little interest. With the freeze in the commercial paper market investors are afraid they will get back less than a buck if they decide to withdraw their deposits. Under the new bailout plan JP Morgan will create some special purpose vehicles (SPV) to buy commercial paper from the 50 largest companies in the market. The Fed will supply JPM with $600 billion to make the buys. For money market funds selling their paper into these SPVs they will get 90 cents on the dollar in cash and a note for 10 cents. The SPV will hold the paper and eventually pay off the notes if the bonds pay as agreed. The funds are at risk for the first ten-cents of loss but they can get back 90 cents immediately to provide liquidity for redemptions.

The focus for traders was not on economics but earnings. Unfortunately there was little to cheer about as company after company reported negative results. Caterpillar (CAT) led the Dow lower after posting earnings of $1.39 per share when analysts were expecting $1.41. CAT said higher material costs and transportation costs continued to weigh on profits. CAT said it was seeing recessionary conditions in North America and forecast flat sales for 2009. Shares of CAT fell -2.07 for the day.

After the bell Apple (AAPL) reported sales of $7.89 billion and earnings of $1.26 per share. Analysts were expecting $1.11 per share and $8.05 billion. Initially shares fell about $3.50 in after hours to $85 despite the great quarter. After traders had time to digest the report they pushed shares back to $105.00. Apple projected profits between $1.06 and $1.35 per share in Q4 while analysts are expecting profits around $1.69 per share. Apple said it had sold 6.9 million iPhones, 11.1 million iPods and 2.61 million Macs. They have $25 billion in cash and no debt. Gross margins rose from 33.6% to 34.7%. In any normal market Apple shares should be exploding.

Apple Chart - 15 Min

Freeport McMoRan (FCX) said profits fell -33% after the price of copper imploded over the last quarter. At the beginning of the quarter copper was going for more than $4 per pound. When the commodity complex collapsed the price dropped sharply with prices currently hovering around $2 per pound. This was the lowest price since 2005. In 2003 it was 61-cents per pound. Companies are now limiting investments in future capacity and cutting back on expenses. Most people don't realize that it was not just oil that crashed when hedge funds began liquidating. Every commodity complex was hit just as hard as oil.

FCX Chart - daily

Shares in Sun Microsystems (JAVA) fell -17.5% after saying it expects to lose 25-35 cents per share compared to analyst estimates for a loss of a penny. There was a $60 million restructuring charge in the Sun projections and net of that charge they still expect to lose 2-12 cents. Sun blamed the slowdown in the economy and weak sales in the company's server business for the loss. Sun also said, "it is likely that the fair value of one or more of its reporting units has been reduced below its carrying value." Sun is preparing another charge of goodwill impairment to offset that value loss.

NetFlix (NFLX) warned for the second time in a month that subscriber growth was slowing as a result of the economic problems. They still beat the street on earnings but after the second warning the stock lost -12% for the day. This is a direct indication that Joe Sixpack is suffering a budget crisis of his own.

Yahoo (YHOO) beat he street by a penny at +9 cents and said it would fire 1500 employees or 10% of its workforce. Profits fell to 4-cents from 11-cents in the comparison quarter. Yahoo also cut their projections for revenue in Q4 to $1.87 billion and also under analyst estimates. Many analysts had privately expected the numbers to be worse and YHOO rebounded +$1 in after hours.

American Express (AXP) said earnings fell more than 20% because of a large increase in loan loss reserves and account charge offs. AXP said they put an additional $1.37 billion aside for bad loans. Some analysts thought bad debts would be worse and shares of AXP rebounded +2.15. US Bank (USB) saw its profits fall by 47% because of higher loan loss reserves. USB added +$748 million to reserves for bad debts. USB said it was considering accepting some capital from the Fed's TARP program even though they said last week they did not need it. USB said it might now accept the Fed's capital in order to make some future acquisitions.

Dupont (DD) said profits fell -30% by declining North American and Western Europe markets and forcing the company to lower its full year outlook. Dupont earned 56-cents after adjusting for a 16-cent hurricane damage charge and analysts were expecting earnings of 52-cents per share. Dupont lost -$2.44 on the news.

I could go on for several more pages with dozens of other companies that had earnings below projections. Almost every company is also lowering their outlook for the next several quarters. There is a recession regardless of what the economic numbers show. Almost every company claims the economy went into a steep dive over just the last 90 days with several reporting that the decline worsened in the last two weeks of Q3.

The negativity from this steady stream of earnings misses and downward projections is having a negative impact on investor sentiment. Add in the continued worries over the financial sector and many investors are worried. I believe everyone expected a decline in earnings but the severity is still a surprise to many. S&P warned today that dividend payouts in Q4 would fall by -10% and the biggest drop in over 50 years.

Another major concern to the market was the closing on the credit default swaps on Lehman. The auction on the $400 billion in Lehman CDS debt was held two weeks ago and that debt was scheduled to be cleared among holders and insurers today. The Fixed Income Clearing Corp said the liquidation process occurred without any material problems and there would be no "loss allocations imposed" on member firms as a result. If any firm had failed to cough up the cash the FICC could have taken action against them. When the news broke the markets rebounded over 285 points back to even but sellers immediately crushed the Dow back to 9000 at the close.

This end of day selling suggests mutual funds are still receiving redemption requests. I reported over the weekend that TrimTabs said funds were seeing outflows of $5 billion per day and October outflows would be a record.

The November crude futures contract expired at the close at $71.29 and a loss of -3.26 despite comments from OPEC members that they could cut production by as much as three million barrels per day. This is not a function of supply and demand but remains a function of fund liquidation. It is not oil specific but continued commodity liquidation.

November Crude Futures Chart - Daily

Natural gas prices rose slightly after Russia, Iran and Qatar agreed to form a "gas troika" for joint exploration and production. Those three countries control more than half of the world's natural gas. This will be similar to OPEC but more of a joint cooperation agreement. They agreed to create a technical committee and one of its missions will be to review projects that can be implemented in a trilateral way. The U.S. and Europe have warned against the Iran-led initiative to create a gas OPEC aimed at controlling supplies and prices. OPEC has been successful in avoiding price fixing charges because every country can always set a price for their own natural resources. Nobody can make a country sell a natural resource. It is purely voluntary and OPEC gets around global rules because in the past they kept prices from rising too high just as they kept them from falling too low. With Russia and Iran at two-thirds of the troika the odds of price fixing are about 100% once the group evolves into something besides a name with good intentions.

I heard somebody in the news today say the Dow drop of just over 200 points was not that bad. That is an example of how far we have come. Market moves of 5% are so common that a trivial -2.3% drop by the Dow today was "not that bad." The NYSE composite fell -3.75% and SOX -4.03%. The Dow appears to be trying to build support at 9000 but it remains to be seen if that will happen. Solid resistance has formed at 9250.

Dow Chart - 30 Min

Nasdaq Chart - 30 Min

The Nasdaq "only" lost -73 points or -1.59% to close at 1695 and that was the low for the week. However, with Apple's sharp rebound to $105 in after hours has pushed the Nasdaq futures up sharply and suggesting the Nasdaq will have a strongly positive open on Wednesday. Considering the Semiconductor Index ($SOX) closed at 234 and very close to a new multiyear low at 223 the Nasdaq can use all the Apple help it can get. The numerous chip stocks disappointing the street over the last week have really soured tech sentiment. I don't know if Apple can single handedly turn this around but we will get that opportunity to see on Wednesday morning.

The Russell lost -2.96% to close at 531 and still well above support at 500. There was no buying interest and sellers did hit it at the close. Funds have not shown any interest in moving back into the small cap market and until end of day redemption selling ends we need to be patient about going long this market.

Russell 2000 Chart - 60 Min

The rest of the week will continue to be earnings driven. This is the heaviest week of the quarter for earnings and once this week has passed we will know the answer for the entire quarter. Earnings will continue to drag on but the excitement will be muted. Analysts will be busy changing estimates for Q4 and trying to decide what they are going to pump up for year-end. In my weekend commentary I warned that we could see another retest of the lows but I felt we were at or very close to a bottom. My outlook really has not changed. The financial crisis is showing signs of easing after nearly $3 trillion in government bailouts. If $3 trillion in cash can't fix it then I need to buy a horse and a plow and start growing my own food. I can't even comprehend what else they could do to further grease the wheels and get the banks lending again. The Fed meets again next Tuesday and they are widely expected to cut rates by another 50-points just to provide confirmation the Fed is still in control. I guess $3 trillion was not enough confirmation. The coming Fed meeting could provide some incentive to cover shorts on any future dip. The markets typically rise into a Fed meeting where a cut is expected and then decline after the cut is announced. If we could get 2-3 days of gains in a row and slow down those fund redemptions we might have a chance for a year-end rally. I would continue to be cautious in entering new positions but I am looking for a real rebound soon.

Jim Brown

The Contrarian

The Put/Call Indicator

As of yesterdays close the CBOE Equity Volume Put/Call ratio dipped down 0.62. This sharp dip down caused the 10 day moving average to tick downward to 0.866 from Fridays recent high of 0.898. Last week, we had a false signal to Positive that was quickly corrected in Wednesdays commentary. The signal is being returned to a Positive bias for two reasons: the 10 day moving average has reversed and the 20 day moving average has continued its decline. The signal will be confirmed once the 10 day moving average breaks below the 20 day moving average. In my opinion, the market and the indicators that lag it will be volatile. The reversal of the 10 day moving average of the Put/Call ratio represents the shift in the bearish trend of buying puts to protect portfolios to a more aggressive catch up and/or stock replacement strategy of buying call options. While we can trade the peaks and troughs in the Put/Call ratio, I prefer to look for confirmation from the short term moving averages. The 10 day moving average closed sharply down 0.032 to 0.866 while the 20 day moving average ticked down a little 0.820 from 0.825. The signal has been changed from a Neutral bias to a Positive bias. SIGNAL: POSITIVE BIAS

Volatility Index Indicator

As of last nights close, the $VIX or the CBOE Volatility Index dropped 17 points to 52.97. The $VIX peaked last Thursday at 81.17 after breaking above the previous weeks high of 76.94. As mentioned before, the highs that we are experiencing are higher than any other time that my charts show. As I write this, the VIX is up slightly after dipping a little to the 20 day moving average. Over the last few weeks I have written about the timing of adding more negative Deltas to ones portfolio when the $VIX tests key support levels such as the 10 and 20 day moving averages. That trade has worked for a while now and may soon begin to loose its luster. If the $VIX closes flat or down, the 10 day moving average will have declined for the first time in almost two months. As of last night, the 10 day moving average was still in advance mode; which means that the signal remains Negative until for one more day. If the market declines and the $VIX moves up, the signal will most likely remain Negative and the short the test of the 20 DMA trade will have worked once again. I prefer to add negative deltas on these tests because I can always adjust the position tomorrow or even this afternoon if the 20 DMA is breached by the $VIX. It is somewhat cheap to be wrong (short) for a day when there is a huge potential to be right for the next big move upward in the S&P.

The $VIXs 10 day moving average closed yesterday at 61.54 while the 20 day moving average closed at 51.11. As mentioned above, the $VIX indicator is still Negative until the 10 day moving average declines. With a market environment like this, we should wait for a two day decline before switching the signal to Positive. I will send out an alert tomorrow if the signal changes. SIGNAL: NEGATIVE BIAS

EPS Trade

As promised in last nights Market Wrap, I am sending out the AAPL EPS short option position. Since I don't cover spreads in this newsletter, I am just going to describe the short call and short put position. This trade needs to be placed prior to the close and covered at the open tomorrow. AAPL is down over $6 to about $92 ahead of the earnings release. Therefore, the example I sent out last night isn't valid because I prefer to sell strikes far enough out of the money so as not to lose much money if it goes against me. The stock looks weak so I am selling the November 70 Puts and the November 115 Calls. As the chart below shows the Delta on the "LIVE" row is negative 67. That means that the position is designed to profit more from a decline in AAPL shares and will lose money should it advance. However, the Delta can change from negative to positive quickly if AAPL declines too far too fast. The Theta shows that this is a positive time decay position. Basically, we should earn about $166 per day from time decay. Mind you that the Delta and Vega changes can offset the time decay gains.

You can't see the option string, but the November options have and Implied Volatility of 85% while the farther our options have an IV of 68 -75%. With that in mind, the assumption is that the options will lose about 15% in IV overnight once the EPS are released and the options open tomorrow. Since the Vega at the current price of $92 is -129.77, the position should profit $129.77 per percentage point decline in the IV. If it only drops 5%, then the position will profit about $600 from volatility and $160 from time decay. The Delta, however, can work against the trade by going up or down too much at the open. The above trade is 10 contracts. Just divide the total margin and max gains to determine the per contract costs and return potential. Below is the P/L chart with tomorrow as the day and 15% less IV. The max gain is about $1,800 if the stock remains flat. But it won't stay here. AAPL can go up to 103 or down to 77 before it begins to lose money, assuming the assumptions are correct. I will send out a trade alert for those that are OptionWriter subscribers at the open once the trade is ready to exit. Otherwise, I will send out a brief summary for tomorrows Market Wrap.

Robert J. Ogilvie

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None ATK None

New Calls

None today.

New Puts

Alliant Tech - ATK - close: 81.39 change: -3.39 stop: 83.05

Why We Like It:
ATK is rolling over and shares look poised to collapse under $80.00 again. Aggressive traders might want to consider new positions right here. We're suggesting readers buy puts if ATK hits $79.75 (or you could wait for a drop under $79.15, which is under the Oct. 16th low). If we are triggered at $79.75 our target is the 74.50 mark, just above the October low. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November puts. Our entry point is $79.75.

BUY PUT NOV 80.00 ATK-WP open interest=116 current ask $4.10
BUY PUT NOV 75.00 ATK-WO open interest= 46 current ask $2.25

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/08 (confirmed)
Average Daily Volume = 340 thousand


CSX Corp. - CSX - close: 45.07 change: -0.50 stop: 46.75

Why We Like It:
CSX, a railroad company, is already on this newsletter as a bullish play but we're waiting for a dip near its lows around $40.00. Instead of just waiting we're going to scalp a few points on the way down. Today's performance produced a short-term bearish double top pattern. We're suggesting put options now with a stop above today's high. Our exit target is $40.50 at which points we'd take profits in the puts and switch to calls.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 45.00 CSX-WI open interest=6905 current ask $3.20
BUY PUT NOV 40.00 CSX-WH open interest=3549 current ask $1.35

Picked on October 21 at $ 45.07
Change since picked: + 0.00
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.9 million


Ultra Dow30 ProShares - DDM - close: 36.27 chg: -1.72 stop: 38.55

Why We Like It:
The DDM is the Ultra-long ETF on the DJIA, which normally moves about twice the performance of the DJIA. I think the DJIA is headed toward the October lows so we're suggesting puts on the DDM. We'll use a stop loss at $38.55. More conservative traders might want to use a tighter stop above today's high. Our target is the $30.50-30.00 zone.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 33.00 HXD-WG open interest= 284 current ask $2.80
BUY PUT NOV 30.00 HXD-WD open interest= 283 current ask $1.60

Picked on October 21 at $ 36.27
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 6.9 million


Energizer Holdings - ENR - close: 58.40 chg: -2.60 stop: 61.65

Why We Like It:
We've been reluctant to play the trend following such a sharp sell-off but the market is struggling to build on its bounces. Shares of ENR are just struggling to bounce. The stock continues to under perform and there doesn't appear to be any significant support until the $50.00 region. We're suggesting readers buy puts now with a stop above this week's high. Our target is the $52.00-50.00 zone. We do not want to hold over the late October earnings report.

Suggested Options:
We're suggesting the November puts.

BUY PUT NOV 60.00 ENR-WL open interest= 232 current ask $4.90
BUY PUT NOV 55.00 ENR-WK open interest= 54 current ask $2.55
BUY PUT NOV 50.00 ENR-WU open interest= 43 current ask $1.20

Picked on October 21 at $ 58.40
Change since picked: + 0.00
Earnings Date 10/30/08 (confirmed)
Average Daily Volume = 838 thousand


Monsanto - MON - close: 85.38 chg: -4.07 stop: 90.15

Why We Like It:
We are going to take another swing at fertilizer-chemical stock MON. Shares exploded higher on Monday during the short-covering rally but the rally failed at $90.00 resistance. We're suggesting puts right here under $90.00. We'll use two targets. Our first target is $76.00. Our second target is 70.50. Be advised that MON could see a lot of volatility on Thursday following a couple of earnings reports from rivals in the sector.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 80.00 MON-WP open interest=5082 current ask $5.30
BUY PUT NOV 75.00 MON-WO open interest=1571 current ask $3.80
BUY PUT NOV 70.00 MON-WN open interest=1641 current ask $2.65

Picked on October 21 at $ 85.38
Change since picked: + 0.00
Earnings Date 12/31/08 (unconfirmed)
Average Daily Volume = million

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

CSX Corp. - CSX - close: 45.07 chg: -0.50 stop: 37.99

Bulls and bears have to admit that CSX out performed the broader market. Instead of losing 3% like the S&P 500, shares of CSX only lost 1%. However, I wouldn't be too bullish. The intraday action looks like a short-term bearish double top pattern. We are sticking with our plan to buy a dip near $40.00. Actually, given today's performance, we're going to try and scalp the ride down with some short-term puts (see our new plays tonight). If CSX does dip toward $40.00 we're suggesting readers buy calls in the $40.50-40.00 zone. If triggered at $40.50 we have two targets. Our first target is $45.00. Our second target is $48.00. Traders need to be aware that two of CSX's rivals, BNI and UNP both report earnings on October 23rd this week. Their earnings news and guidance could have a big impact on CSX's performance.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million


DIAMONDS - DIA - close: 90.38 change: -2.90 stop: 74.40

The market failed to build on yesterday's gains. Intraday most of the major indices created a short-term bearish double top pattern. We're going to stick to our plan to buy a dip in the DIA in the $80.25-79.00 zone. If the DIA hits our trigger to buy calls at $80.25 our first upside target is $88.50. Our second target is $94.50. More conservative traders may want to use a stop loss much tighter than our stop at 74.40.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 30 million


Hansen Natural - HANS - close: 24.10 change: -1.05 stop: 18.95

It's been a very volatile week for HANS. In the last two days the stock has rallied from $22.00 to almost $27.00 this morning and now back to $24. I still think HANS has a good chance to retest the lows near $20. We are suggesting readers buy calls on a dip into the $20.65-20.00 zone. If we are triggered at $20.65 then our target to exit the calls is at $24.50 and then $27.50.

FYI: More nimble traders might want to try and scalp a couple of points in HANS on the way down toward $20.00. Plus, if HANS continues to fall and hits our stop loss at $18.95 we would strongly consider buying puts and aiming for $15.00.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million


iShares Russ.2000 - IWM - cls: 53.18 chg: -1.51 stop: 44.90

The Russell 2000 small cap index kept pace with the S&P 500 and delivered a 3% loss today. The IWM etf only lost 2.7%. The trend is certainly negative. Right now we're waiting to buy calls on a dip into the $48.50-45.00 zone although we may have to reconsider if we see another bounce from the $50.00 level. If triggered at $48.50 we're listing two targets. Our first target is $54.50, which could be hit in just a few days. Our second target is $58.00, which might take a few weeks.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 123 million


MasterCard - MA - close: 149.78 chg: - 0.36 stop: 118.99

If you're just looking at the final numbers today then MA did pretty well compared to the S&P 500. MA only lost 0.2%. Yet the intraday moves are growing more and more bearish. A dip towards $130ish seems more and more likely. We are going to withdraw our Trade #1, which was to buy calls on a dip in the $141-140 zone. We will stick with our planned Trade #2, which is to buy calls on a dip in the $131.00-120.00 zone. Our first target is $158.00. Our second target is $169.50.

Last Thursday I suggested a couple of alternative strategies. One was a covered call play. Today I would look for the dip to $140ish and then consider buying the stock and selling some calls. The second alternative was selling the puts. Look for the dip toward $140 and then sell puts to collect the premium but only if you're happy to own the stock. You could sell the November $140s puts for about $15.00 if MA nears $140. The January $140s puts will probably be over $20 if MA nears $140. You still need an exit plan if MA continues to drop!

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million

Put Updates

Volatility Index - VIX - cls: 53.11 chg: + 0.14 stop: n/a

Today was the last day for trading October VIX options. Most of our suggested plays on the VIX involve the November 2008 options. If stocks are poised to move lower tomorrow then the VIX will most likely bounce and retrace some of Monday's huge drop. We're not suggesting new put positions at this time.

Note: The VIX options, which are European style options, have a unique expiration date. October VIX options expire on October 22nd, 2008. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link.

Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position may be dead. We still have plenty of time with these next two. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00.

Picked on September 16 at = 30.30 first position
Change since picked: +22.81
Picked again Sept. 29 at = 46.72 second position
Changed since picked: + 6.39
Picked again Octo. 08 at = 57.53 third position
Changed since picked: - 4.42
Earnings Date 00/00/00
Average Daily Volume = --- million

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)


CBOE Volatility Index - VIX - cls: 53.11 chg: + 0.14 stop: n/a

Our spread using October options is now over. Today was the last day. If you were able to exit near the VIX's lows today then the loss on the play would have been $1.00 (per option) on the October $40 calls. If you let it expire then we are setting at a $3.00 loss. If you opened positions later than Monday, October 13th then you should have made a small profit.

Our November trade is setting up pretty well, especially if you opened positions after Monday, Oct. 13th. We're not suggesting new positions at this time.


Please see the CBOE website or our Sunday, October 12th play description for details on margin requires for selling VIX options.

Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. October options expire on Wednesday, October 22, 2008 and will stop trading on Tuesday, Oct. 21. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.

VIX spread #2 with November options:

We wanted to SELL the November 30 calls (opening price was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.

In a different format the play is:

Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid

Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask

Picked on October 12 at $ 69.95
Change since picked: -16.84
Earnings Date 00/00/00
Average Daily Volume = ---

Dropped Calls


Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Jim Brown, The Contrarian by Robert Ogilvie, and all other plays and content by the Option Investor staff.


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