Option Investor
Play Updates

Friday's market gap down had a big impact.

Printer friendly version

---------------------- CALL Play Updates ----------------------

CSX Corp. - CSX - close: 42.38 chg: -1.36 stop: 38.90*new*

If we had only been more patient and waited until Friday then CSX would have hit our original entry point in the $40.50-40.00 zone. Instead we jumped the gun on Thursday night suggesting new positions above $43. Actually, fortune smiled on us anyway as CSX gapped open lower on Friday at $40.41, which would have been our first opportunity to open new positions. The stock rebounded but eventually pared its gains. So here we are with a bullish call play on CSX and the trend is bearish. Essentially we're betting that long-term support near $40.00 will hold as it has done several times in the past. Given our $40.41 entry point we're going to widen our stop loss to $38.90. More conservative traders will want to consider keeping their stop right where it is, about five cents under Friday's low. Our target on CSX is $49.90. At the moment odds look pretty good that CSX will retest the $41.50-40.00 zone on Monday so if you're looking for new positions I'd wait for another dip.

Suggested Options:
We are suggesting the November calls.

Annotated chart:

Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 1.97 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million


Hansen Natural - HANS - close: 21.12 change: -1.76 stop: 19.95

As fate would have it we were given a lower entry point with HANS as well. Our original plan was to buy calls on a dip in the $20.65-20.00 zone. Thursday night we decided to jump in at $22.88. Well Friday morning rolled around and HANS gapped open lower at $20.60 - at least that is what most quote services are going to tell you. If you look at an intraday chart HANS never traded under $21.00. It appears that HANS actually opened on Friday morning at $21.47, which is where we're setting the official entry price. The short-term trend is obviously down. If you are looking for a new position we would wait for a dip into the $20.50-20.00 zone. Now that the play is open we have two targets. Our first target is $26.85. Our secondary target is $30.00.

Note: If HANS breaks down under $20.00 it would be very bearish. We're suggesting readers buy November puts on HANS if the stock trades under $19.50 and target the $15.50-15.00 zone.

Suggested Options:
Currently we are suggesting the November calls.

Annotated chart:

Picked on October 23 at $ 21.47 /gap down entry
Change since picked: - 0.35 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million


MasterCard - MA - close: 130.62 chg: - 5.38 stop: 118.99

These days it pays to wait for your entry point. We could have bought MA closer to $120 instead of $130. We had been suggesting readers buy calls on MA on a dip into the $131-120 zone. Shares hit our trigger on Thursday at $131.00. Friday's morning scare sent MA plummeting lower and the stock actually traded around $118.50 in pre-market hours. When the market finally opened MA began trading at $122.28 (not the $120.02 your quote service my tell you) and within 15 minutes MA was back above $130. The trend is very negative here. Readers might feel more comfortable waiting for a bounce back above $140.00 before initiating bullish positions. At the moment, if you're looking for a new bullish entry point, I would be watching for another dip into the $125-120 zone. We have two targets. Our first target is $158.00. Our second target is $169.50.

Remember, MA doesn't have any consumer credit exposure. The company only processes transactions. This massive sell-off is way overdone and is probably just investors (and funds) liquidating anything of value to raise cash. If we get stopped out at $118.99 I would be looking for another bullish entry point near the $100 zone.

Suggested Options:
We are suggesting the November calls. However, keep in mind that we do not want to hold over the early November earnings report. That only gives us one week.

Annotated chart:

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: - 0.38
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million


Energy SPDR - XLE - close: 43.65 chg: -2.90 stop: 37.45

We continue to wait for the XLE to pull back and retest its October lows. Nimble traders could try and scalp a couple of points on the way down. We're going to wait for our bullish entry point. Right now our suggested entry to buy calls is the $40.50-39.00 zone. If triggered we're setting two targets. Our first target is $45.00. Our second target is $49.75.

Suggested Options:
If triggered we are suggesting the November calls.

Annotated chart:

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 47.7 million


---------------------- PUT Play Updates ----------------------

Volatility Index - VIX - cls: 79.13 chg: +11.83 stop: n/a

Hmm... let's review our check list. Did we see incredible volatility in the stock market? Check. Did the volatility index see a double-digit percentage move? Check. Did the volatility index hit new obscene, record highs? Check. Did the VIX close near these new obscene, record highs? Check. Well it looks like just another "normal" day in the markets. The volatility we are seeing is just incredible. If you subscribe to the idea that we are experiencing a once-in-a-century event for the financial markets then we are probably seeing lifetime highs in the VIX. Years from now people will point back to these wild swings in the VIX with amazement. At least that's the hope. We certainly don't want this to become the new "normal".

At this point with the VIX this high we don't want to buy VIX options. We'd rather sell VIX options. More aggressive traders might want to just sell some at-the-money or out-of-the money VIX calls for November. If you really wanted to get crazy you could sell some in-the-money VIX calls (maybe the 65s or 60s). In spite of the jaw-dropping moves in the VIX odds are still better that the VIX will see a major contraction before November options expire on November 19th. If the VIX is under your call's strike price at expiration they'll expire at zero ($0.00) and you keep all the premium you sold it for.

Note: The VIX options, which are European style options, have a unique expiration date. 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.

Suggested Options:
We are not suggesting new put positions at this time.

Annotated chart:

Picked on September 16 at = 30.30 first position
Change since picked: +48.83
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +32.41
Picked again Octo. 08 at = 57.53 third position
Changed since picked: +21.60
Earnings Date 00/00/00
Average Daily Volume = --- million


---------------------- Strangle & Spread Play Updates ----------------------

CBOE Volatility Index - VIX - cls: 79.13 chg: +11.33 stop: n/a

It was another record-breaking day on Friday for the VIX. The moves to these high extremes provide investors who are selling options more opportunities to increase their odds of success. You can tell by looking at the prices for November options versus Decembers that the market is expecting a big drop in volatility over the next several weeks. Our question is how far will volatility contract in the next three weeks? We would still consider new positions but if you're launching new spreads now consider adjusting your strike prices higher than the ones we have listed.


Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link: http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

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

VIX spread #1 has been completed.

VIX spread #2 with November options (date Oct. 12th):

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
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid

-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
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask

Picked on October 12 at $ 69.95
Change since picked: + 9.18


VIX spread #3 with November options (published 10/22/08):

We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.

In a different format the play is:

Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid

-and- BUY CALL NOV 60.00 VIX-KN
Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask

Picked on October 12 at $ 69.65
Change since picked: + 9.48

Annotated chart:


---------------------- CLOSED PLAYS ----------------------

-- Closed Call Plays --

iShares Russ.2000 - IWM - cls: 47.17 chg: -1.82 stop: 46.45

It was a painful morning for stocks on Friday. We had just been triggered in the IWM on Thursday's dip past $48.50. Friday morning saw the IWM gap open lower at $44.95, well under our stop loss, before the small cap ETF bounced back.


Picked on October 23 at $ 48.50 *triggered 10/23
Change since picked: - 1.33 /stopped out 44.95 gap down
Earnings Date 00/00/00
Average Daily Volume = 123 million


SPX Corp - SPW - close: 41.37 change: -2.07 stop: 39.95

It was an awful morning for stocks and the opening was so bad that our play on SPW never opened. The stock gapped open lower at $38.61, which was under our stop loss at $39.95. The stock did rebound back above $40.00 but we're yanking our plans to buy calls given the market's move.


Picked on October 23 at $ xx.xx <--never opened
Change since picked: + 0.00 /originally listed at $43.44
Earnings Date 10/29/08 (unconfirmed)
Average Daily Volume = 1.2 million


U.S. Oil Fund - USO - close: 53.00 chg: -3.60 stop: 54.45

Our attempt to buy calls on the USO was also aborted before we got the chance to play it. The morning weakness on Friday was so bad that the USO gapped open lower at $51.37. This was well below our stop loss at $54.45 so the play would have never opened. At this point, given Friday's big decline, the USO doesn't appear to have any support until the $47.50 region.


Picked on October 23 at $ xx.xx <-- never opened/gap under stop
Change since picked: + 0.00 /originally listed at $56.60
Earnings Date 00/00/00
Average Daily Volume = 13.1 million


Play Update Archives