The stock market could see some very volatile swings tomorrow afternoon. Investors are expecting some sort of stimulus from the Federal Reserve. There is a good chance that traders actually sell the news if Ben Bernanke doesn't surprise us with something more than Operation Twist.
Since we know tomorrow has a pivotal, market-moving event and a convenient deadline (around 2:15 p.m. ET) we considered adding some market-neutral trades like a straddle or a strangle to take advantage of any potential volatility. Yet looking at options on the SPY, the DIA, and the IWM, they all seemed too expensive.
Example: A straddle on the SPY at the $120 strike would cost $4.22 for the call and $4.12 for the put. That's $8.34. Let's say you wanted a strangle on the DIA with strikes a couple of points away from its current price ($113.88). The October $116 call is $2.51 and the $112 put is $3.10. That would cost $5.61. Could the DIA move more than five points tomorrow? Of course, but will it move that much?
If these prices do not deter you then you might want to consider some sort of neutral trade tomorrow just make sure you get it in place before the FOMC announcement is released.
NEW DIRECTIONAL CALL PLAYS
Check Point Software - CHKP - close: 56.71 change: -0.88
Stop Loss: 55.70
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below
Why We Like It:
Shares of CHKP have been flirting with six-week highs but it has been stuck under resistance at the $58.00 level. If the stock market rallies on the FOMC announcement tomorrow then we could see CHKP breakout past this level.
I am suggesting we buy calls on CHKP when the stock hits $58.25.
The FOMC announcement will hit around 2:15 p.m. tomorrow and the market could see some very significant swings either way (or both ways). More conservative traders may not want to trade anything until much later on Wednesday or consider waiting to open new positions until Thursday.
An alternative entry point would be a dip or a bounce near $54.00 (with a tight stop loss).
Trigger @ 58.25
- Suggested Positions -
buy the OCT $60 call (CHKP1122J60) current ask $1.25
Entry on September xx at $ xx.xx
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 20, 2011