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Call Updates

CSX Corp. - CSX - close: 45.57 chg: +2.24 stop: 37.99

On Friday stocks ended the day headed lower and we were expecting some follow through today. The markets delivered a widespread bounce instead. For the moment we are going to stick to our plan, which is to buy a dip in CSX in the $40.50-40.00 zone. More aggressive traders might want to consider buying a rally through $46.00 or $46.50 with a stop around $44.00 instead. If we are triggered at $40.50 we'll 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

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DIAMONDS - DIA - close: 93.28 change: +5.74 stop: 74.40

On the 21st anniversary of Black Monday the DJIA performed admirably with a 4.5% gain. The DIAMONDS actually did better with a 6.5% gain. It would be tempting to buy this rally. If you do buy this rally I'd probably use a stop under $90.00 and target a move to $98.00. Right now we are going to stick to our plan for the DIA, which is to buy a dip in the $80.25-79.00 zone. Should we see a clear bearish reversal set up then we might try and scalp a few points on the way down. 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

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Hansen Natural - HANS - close: 25.15 change: +2.53 stop: 18.95

It's the same story here with HANS. The stock rallied sharply as stocks typically do in a bear market. The close over $25.00 is a tempting entry point to get long some calls on HANS. If you do buy this rally I'd probably use a stop loss under today's low. We are going to stick to our plan, which is to buy a dip in 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.

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

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iShares Russ.2000 - IWM - cls: 54.69 chg: +2.24 stop: 44.90

The Russell 2000 index delivered a 3.8% gain and the IWM ETF out performed its underlying equity with a 4.2% gain. The IWM has rallied right to short-term resistance at its 10-dma. Meanwhile the RUT actually closed over its 10-dma. Looking at the IWM, if you want to buy this rally, wait for a move over Friday's high of $55.45. We're going to stick to our plan, which is to wait for 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

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MasterCard - MA - close: 150.14 chg: - 6.61 stop: 118.99

MA actually under performed the market on Monday. We didn't see anything specific to account for the weakness. Things could change tomorrow. AXP reported earnings out after the closing bell tonight and the results were better than expected. Both AXP and MA were trading higher after hours. Currently we have two different trade set ups for MA.

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.

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: 52.97 chg: -17.36 stop: n/a

Today is a great example of how fast the VIX can move (as if last week wasn't a good enough example). The Volatility index "opened" down at 70.40 and plunged throughout the day to end with a 24.6% drop. We are not suggesting new positions at this time. These days if the VIX is up one day it's down the next or reverses intraday. We don't see any changes from our weekend comments. Tomorrow is the last day of trading for October VIX options.

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:
http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

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: +22.67
Picked again Sept. 29 at = 46.72 second position
Changed since picked: + 6.25
Picked again Octo. 08 at = 57.53 third position
Changed since picked: - 4.56
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.)

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CBOE Volatility Index - VIX - cls: 52.97 chg: -17.36 stop: n/a

Today was a good day for our October play. The VIX gapped open lower and that decimated the October 60 call but it also cut the October 40 calls in half. If the market continues higher tomorrow we should be in good shape. If you opened positions almost any time last week you should be in pretty good shape!

Tomorrow is the last trading day for October 2008 VIX options. So what happens if we just let them expire? If stocks continue higher then the October 60 options will expire worthless as long as the VIX is under 60. The October 40s will expire at whatever their intrinsic value is. Hypothetically if the VIX closes at 50.00 tomorrow we will essentially break even. Our estimated entry on selling the October 40s was around $13.00 and our estimated entry on buying the October 60s was about $3.00. We collected $13.00 and paid $3.00. Our account would have gained a net of $10.00. If the VIX closes at 50.00 tomorrow then the October 40s will be worth $10.00, which will be deducted from our account. Net gain/loss is essentially zero. If you happened to sell the October 40s at any thing higher then you're in much better shape.

It is up to you if you want to let the VIX options expire or try to time an exit somewhere on an intraday basis depending on how stocks are moving.

We're not suggesting new November positions at this time.

Summary:

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 an 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:
SELL CALL OCT 40.00 VIX-JH.
Monday 10/13/08 open 13.00, high 15.16, closed 11.00
Update 10/15/08 open 11.00, high 17.00, closed 17.00
Update 10/16/08 .........., high 29.60, closed 23.75
Update 10/17/08 open 27.00, high 27.00, closed 23.90ask
Update 10/20/08 open 21.00, high 21.00, closed 12.50ask

-and-
BUY CALL OCT 60.00 VIX-JN.
Monday 10/13/08 open 2.90, high 3.70, closed 1.80
Update 10/15/08 open 1.35, high 5.00, closed 4.40
Update 10/16/08 open 4.10, high 12.20, closed 7.90
Update 10/17/08 open 8.40, high 9.50, closed 6.60ask
Update 10/20/08 open 4.50, high 4.50, closed 0.90bid

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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:

SELL CALL NOV 30.00 VIX-KF.
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

-and-
BUY CALL NOV 50.00 VIX-KJ.
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

Picked on October 12 at $ 69.95
Change since picked: -16.98
Earnings Date 00/00/00
Average Daily Volume = ---
 

Dropped Calls

None
 

Dropped Puts

Arch Coal - ACI - close: 26.75 change: +2.60 stop: 25.90

Coal stocks continued to rebound on Monday. We were expecting some follow through lower after the Friday afternoon sell-off. Shares of ACI opened at $25.67 and quickly rallied through our stop loss at $25.90 and eventually closed up 10.7% on the day.

Picked on October 19 at $ 24.15 /stopped out 25.90/opened 25.67
Change since picked: + 2.60
Earnings Date 10/27/08 (confirmed)
Average Daily Volume = 8.7 million

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Monsanto - MON - close: 89.45 change: +9.45 stop: 85.01

When it became apparent that stocks were going to open higher on Monday the short covering in MON began. The stock gapped open at $82.96 and quickly stopped us out at $85.01 before 10:00 a.m. MON went on to rally towards round-number resistance at $90.00. While this bearish play is closed I would keep an eye on MON for a failure in the $90-95 zone where the stock has some resistance.

Picked on October 19 at $ 82.96 opened/stopped 85.01
Change since picked: + 0.00 (listed at $80.00 on Sunday)
Earnings Date 10/08/08 (confirmed)
Average Daily Volume = 9.8 million

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PetroChina - PTR - close: 87.56 change: +7.72 stop: 84.05

Unfortunately, it's a similar story here with PTR. Positive pressure before the opening bell led PTR to gap open higher at $82.24 and quickly stopped us out at $84.05. The short covering eventually left PTR up almost 9.6%. The stock has some resistance in the $92.50-95.00 zone. Be careful if you decide to switch directions.

Picked on October 19 at $ 82.24 opened/stopped 84.05
Change since picked: + 0.00 (listed @ 79.84 on Sunday)
Earnings Date 03/06/09 (unconfirmed)
Average Daily Volume = 947 thousand
 

Dropped Strangles

None
 

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