Play Editor's note: There is still a lot of uncertainty and fear in the markets and stocks could still go lower even though Friday had a lot of potential to be a significant bottom. The best trade is probably to sit on the sidelines. The dust hasn't even begun to settle yet. FYI: Keep an eye on AAPL. If AAPL trades over 101.50 it might be a buy. I'd even consider buying calls on another dip to $85.00 with a tight stop! I'd also watch CF, which is another fertilizer stock. Shares have been showing a little relative strength lately.
Mosaic - MOS - close: 36.40 change: -0.12 stop: varies
Why We Like It:
BUY CALL NOV 45.00 MOS-KI open interest=11932 current ask $4.20
Picked on October xx at $ xx.xx <-- see TRIGGER
CBOE Volatility Index - VIX - cls: 69.95 chg: +6.03 stop: n/a
Why We Like It:
Here's the plan. We cannot conceive that the VIX can maintain its position this high for very long. It can stay elevated (a.k.a. above 30) for a while but no way it's staying up near 70% volatility. We're listing two different plays. One uses October options. The other uses November options. We are selling some deep in the money calls and buying much higher calls as a form of insurance should the unthinkable happen. We'll collect the money on selling the deep in-the-money calls, which will sit in our account until we decide to exit the play and buy them back or until the options settle. As the VIX contracts the premiums on all of these options will collapse.
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.
Note on Margin - Here's what the CBOE website has to say about margin: "Purchases of puts or calls with 9 months or less until expiration must be paid for in full. Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 15% of the aggregate contract value (current index level x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use option current market value instead of option proceeds.) Additional margin may be required pursuant to Exchange Rule 12.10."
VIX spread #1 with October options:
We want to SELL the October 40 calls (bid is $16.70) and BUY the October 60 (ask $5.60) as a hedge against the VIX remaining elevated.
SELL CALL OCT 40.00 VIX-JH open interest=27528 current bid $16.70
VIX spread #2 with November options:
We want to SELL the November 30 calls (bid is $10.20) and BUY the November 50 (ask $2.25) as a hedge against the VIX remaining elevated.
SELL CALL NOV 30.00 VIX-KF open interest=41669 current bid $10.20
Picked on October 12 at $ 69.95