Option Investor
Play Updates

Late-day sell-off reaffirms downtrend

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Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.

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

Burlington Northern - BNI - cls: 85.05 chg: +1.60 stop: 73.85

The short covering continued into Wednesday and the afternoon push lifted BNI to $89.78, just shy of the $90.00 round-number resistance. Then suddenly the market turned south in the last 15 minutes and BNI collapsed back to $85. I suspect that shares might retrace lower tomorrow. Previously we had been suggesting readers buy calls on a dip into the $75.50-74.00 zone. I'm considering a higher entry point but we're not going to change it yet. Right now I'm watching for a potential bounce in the $80.00-82.50 zone. If we do see a bounce there it might be an entry point to buy calls with a stop under $80.00.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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CSX Corp. - CSX - close: 43.34 chg: +0.21 stop: 39.49

Railroad stock CSX was also looking strong intraday. The stock got to $47.25 late this afternoon before giving almost all of its gains back. This does not illustrate strength when investors rush to sell in the last 15 minutes. If we see another dip in the $40.50-40.00 zone then I might be tempted to open new bullish positions. Otherwise I would avoid new bullish positions. if CSX hits our stop loss at $39.49 it might be a signal to buy puts instead! Currently our target to exit is $49.90.

Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 2.93 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million

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Freeport McMoran - FCX - close: 28.24 change: +1.50 stop: 18.45

FCX rallied right to resistance near $30.00 and stalled. It did hit $30.23 intraday but couldn't hold it. Nor could it hold above its simple 10-dma. At this point the trend remains bearish. More nimble traders may want to consider bearish positions to scalp a few points on the way down. We're going to stick to our plan to buy calls in the $21.00-20.00 zone. However, if we see another bounce from $23.00 we might re-evaluate. An alternative entry point, should FCX continue to rally, would be to buy calls on a breakout over $30.50 where I'd probably use a stop under $28.00. All right, I know I'm throwing a lot of numbers out. Here's a summary. Officially we want to buy calls at $21.00. Unofficially I'd be tempted to buy a bounce from $23.00 or a new relative high over $30.50 with a stop 6.5% to 10% under my entry point. I would try to catch a 15% to 20% gain in the stock.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million

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Hansen Natural - HANS - close: 23.91 change: -0.13 stop: 19.95

HANS did not see the same sell-off the rest of the market did late in the day. It still traded lower and ended in the red but the velocity of the drop wasn't as bad as the DJIA or the S&P 500. It's possible that HANS is struggling with round-number resistance at $25.00. Thus the next move might be down. More conservative traders will want to consider taking some money off the table or raising their stop loss significantly. We're not suggesting new bullish positions.

We have two targets. Our first target is $26.85. Our secondary target is $30.00.

Picked on October 23 at $ 21.47 /gap down entry
Change since picked: + 2.44 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million

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MasterCard - MA - close: 135.73 chg: - 0.28 stop: 118.99

It was another volatile day for MA with $10 swings in the stock price. The stock traded near $144 twice before ending lower. The overall pattern for MA is still bearish, which should put us on the defensive. We're not suggesting new positions at this time. More conservative traders may want to raise their stops toward Tuesday's low (123.50). We have two targets. Our first target is $158.00. Our second target is $169.50.

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: + 4.73
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million

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Energy SPDR - XLE - close: 48.13 chg: +1.04 stop: 37.45

I'm not willing to give up yet on buying a dip near support around $40.00. On the other hand I wouldn't want to open bearish plays with a target near $40.00. This volatility is hard to read. A breakout over the Oct. 20th high around $51.30 might be a bullish signal. We're going to wait and see how the market reacts tomorrow before making any decisions on XLE.

Currently the plan is to buy calls in 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.

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

Volatility Index - VIX - cls: 69.96 chg: + 3.00 stop: n/a

The VIX was poised to close at a new five-day low under 65.00 until a last hour sell-off in stocks sent the volatility higher again. The bigger picture continues to look like the VIX has probably topped but that doesn't mean the market won't continue to be volatile.

We're not suggesting readers buy puts at this time. With the VIX this high if you want to bet on its going lower the better bet would be to sell calls instead.

Trading Idea: If you think this is one last gasp higher for the VIX (either tonight or tomorrow) consider selling some calls. The November 65 calls are trading around $4.50 at the bid. The Nov. 70s are $3.40 bid and the 75s are $2.55 bid.

If the VIX is under your call's strike price at expiration (11/19/08) 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.

Picked on September 16 at = 30.30 first position
Change since picked: +39.66
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +23.24
Picked again Octo. 08 at = 57.53 third position
Changed since picked: +12.43
Earnings Date 00/00/00
Average Daily Volume = --- million

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

CBOE Volatility Index - VIX - cls: 69.96 chg: + 3.00 stop: n/a

We don't see any changes from our prior comments on the VIX spread plays.

Summary:

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 10/13/08 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
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
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid
Update 10/29/08 open 25.60, high 25.60, closed 26.20bid

-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
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask
Update 10/28/08 open 11.00, high 13.30, closed 9.40ask
Update 10/28/08 open 9.23, high 10.70, closed 11.00ask

Picked on October 12 at $ 69.95
Change since picked: + 0.01

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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:

SELL CALL NOV 35.00 VIX-KI
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
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid
Update 10/29/08 open 19.59, high 21.13, closed 20.90bid

-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
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask
Update 10/29/08 open 5.40, high 6.30, closed 6.50ask

Picked on October 12 at $ 69.65
Change since picked: + 0.31

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

PriceLine.com - PCLN - close: 55.67 change: +2.83 stop: 54.15

Tuesday's afternoon rebound continued into Wednesday and shares soared to $57.88. PCLN has had a 28% range in the last two days making it almost impossible to trade. Shares hit our stop loss at $54.15 early this morning ending the play after the stock hit our early target yesterday at $45.25.

Chart:
PCLN

Picked on October 27 at $ 50.40 /gap open entry/target hit 45.25
Change since picked: + 5.27 /originally listed at 49.25
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 2.0 million

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