DIAMONDS - DIA - close: 87.54 change: -2.17 stop: 74.40
Several of the major market averages not only put in a lower high but the failed rally today ran out of steam around the 61.8% Fib retracement of its Monday-Thursday decline. We are sticking to our plan to buy calls on a dip in the $80.25-79.00 zone. However, we're also adding some short-term puts on the DIA, see the new play section tonight. 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
Hansen Natural - HANS - close: 22.62 change: -0.38 stop: 18.95*new*
We feel pretty confident that HANS is going to retest its lows near $20.50 soon. The question is will support hold this time? Right now the plan is to buy calls on a dip into the $20.65-20.00 zone. We're going to widen our stop loss to $18.95. More conservative traders will want to consider a tighter stop (maybe 19.75-19.45ish). If we are triggered at $20.65 then our target to exit the calls is at $24.50 and then $27.50.
However, if HANS continues lower and hits our stop loss at $18.95 we want to immediately switch to puts. Our stop at $18.95 can be used as the entry point to buy puts. If triggered with the puts our first target is $15.05 with a stop loss at $20.65.
On Thursday I mentioned a covered call alternative or a naked put alternative. Those strategies still apply but you have to play with some sort of exit plan!
If HANS hits our stop at $18.95 then we suggest buying puts. We'd use the November $17.50s, which are the lowest strikes available at this time.
Picked on October xx at $ xx.xx <-- see TRIGGER
MasterCard - MA - close: 156.75 chg: + 0.07 stop: 118.99
MA held up relatively well compared to the rest of the market on Friday. However, the intraday action was still bearish. Nimble traders could try and scalp a few points between here and $140, which is where we think MA is headed.
We are going to alter our plan here and split it up into an aggressive trade and a slightly less aggressive trade. I can't call it a conservative trade because MA is so volatile and the options are so pricey.
Trade #1 is to buy calls on MA if the stock trades down into the $141.00-140.00 zone. We'll stick with a wide (a.k.a. aggressive) stop loss at $118.99. Our first target is $164.00. Our second target is $177.50.
Trade #2 (less-aggressive) is to buy calls on MA if the stock trades in the $131.00-120.00 zone with a stop loss at $118.99. Our first target is $158.00. Our second target is $169.50.
On 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!
Trade #1, I'd consider the November 150s, 160s even 170s.
Trade #2, I'd consider the $140s, 150s and 160s.
Picked on October xx at $ xx.xx <-- see TRIGGER
Volatility Index - VIX - cls: 70.33 chg: + 2.72 stop: n/a
The Volatility index continues to trade near all-time record highs. At this point with the market rolling over on Friday afternoon it looks like the VIX will re-challenge its highs near 80 soon. Buying VIX options with volatility this high doesn't seem like the best play. Selling VIX options is a better way to take advantage of these high option prices. Even though the VIX will be lower in November I'd rather not buy new VIX puts they're just too expensive.
On September 16th we started this play on VIX options and listed either the October or November puts. Those Octobers are going to expire worthless here in a couple of days. The November strike we listed is a long shot at this point and will most likely expire worthless too.
The September 29th and October 8th positions suggested November options and we have a much better chance of success.
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
(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: 70.33 chg: + 2.72 stop: n/a
Needless to say our VIX spread trade isn't working out as planned, at least not the October trade. We listed this play last weekend after the VIX had just peaked at its (then) record highs. A reversal seemed like a sure bet and the VIX did reverse. It fell from 70 last Friday, Oct. 10th to 46.35 at its Tuesday low. Unfortunately, it quickly reversed and made a new high. October VIX options expire this Wednesday and stop trading at Tuesday's close. Right now we're in the hole with the October spread.
Our October trade was to sell the October 40 calls and buy the October 60s. If the stock market is poised to trade lower Monday morning we want to buy back the October 40s we sold (for a loss) but keep the October 60s, which have risen in value. You could dump both positions but if the VIX is going to keep rising then the October 60s will keep climbing as well (as will the 40 calls, which is why we want to buy them back to cover the short). I would actually sell the October 60s if the VIX nears 80 again (official exit will be 79.50). More aggressive traders could just let it ride. It's possible we might be able to get out of the October trade without a loss - it depends on what happens Monday.
Okay, so what happens if stocks are poised to move higher on Monday morning? Then we would keep the October trade open. If stocks rally then the VIX will tend to contract. The trick will be to decide when and where to close the position. I know there are a lot of "ifs" here in this play. If stocks manage to hold any gains on Monday then keep the play open look to exit completely on any rally on Tuesday. Or you could just let them expire. VIX options are cash settled.
The November trade is still in good shape. If you're looking for a new position I would consider a new trade on Monday, especially if the VIX is climbing near 80 again. Our November trade was to sell the November 30 calls and buy the November 50s. You may want to adjust those strikes depending on your risk tolerance and where the VIX is trading when you open the play.
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.
We have listed two different plays. The strategy was to sell a deep in-the-money call to collect the premium while buying a much higher call as a partial hedge should the VIX remain extremely elevated.
VIX spread #1 with October options:
We wanted to SELL the October 40 calls (the opening price Monday morning was $13.00) and BUY the October 60 (open was $2.90) as a hedge against the VIX remaining elevated.
Here is the strategy in another format:
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.
*Sunday, 10/19/08* If I was looking for a new position this looks like a pretty good trade, or you could sell the November 40 calls (currently trading around $10.00) and buy a higher call as a hedge.
In a different format the play is:
SELL CALL NOV 30.00 VIX-KF.
Picked on October 12 at $ 69.95
Apple Inc. - AAPL - close: 97.40 change: -4.49 stop: 91.45
Yesterday we decided that the sharp bounce from AAPL's lows near $92 looked like a bullish entry point to buy calls. Today's failure to see any follow through on that bounce is a big warning sign, especially in this market. We have to tread lightly in this market so we're suggesting an early exit immediately. Cut our losses now before they get worse. If you decided to make this a covered call play then you have more room for error based on what call and the amount of premium you collected. The same goes for selling puts. Just be sure to use some sort of stop loss plan to limit losses.
FYI: Friday's movement in AAPL looks like a mini-double top, which is bearish. Very quick and nimble traders could buy puts with the expectation that AAPL will fall toward 87-85 again. The challenge is your time frame. Earnings are due out on Tuesday afternoon after the market close. We would not want to hold over the report. See tonight's play editor's comments for more details.
Picked on October 16 at $101.89 /exiting early