Option Investor
Play Updates

Looking for a dip

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Play Editor's Note: The expectation this week is that the market will see some sort of profit taking after a 10% bounce in the market. More and more it looks like the lows are behind us at least for the next few weeks. November begins a traditionally bullish time of year for stocks but these seasonal trends may struggle as we face a global recession. Our short-term plan is to buy the dips. Our challenge will be stop loss placement. We want them to be tight but not too tight. I wouldn't be surprised if the market did nothing Monday and Tuesday as the nation waits to see who is elected President but many market pundits are already discounting an Obama win.

______________ CALL Play Updates ______________

Burlington Northern - BNI - cls: 89.06 chg: +2.47 stop: 82.45

The big news for BNI on late Thursday-early Friday was a headline that Warren Buffet of Berkshire fame bought another 825,000 shares of BNI. His company now owns almost 19% of BNI stock. Most would consider that a huge seal of approval from the Oracle of Omaha. Shares of BNI bounced from round-number support near $85.00 on Friday morning, which was where we suggested readers open new bullish positions. We're going to leave our stop loss at $82.45 for now but more conservative traders may want to tighten their stop a little toward $84.00. There is short-term resistance at $90.00 but we're aiming for $94.00. The 100-dma and 200-dma look like big resistance near $95.00.

Suggested Options:
If the market dips this week we would buy the November calls on a BNI dip back into the $86-84 zone.

Annotated chart:
BNI

Picked on October 30 at $ 86.59
Change since picked: + 2.47
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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CSX Corp. - CSX - close: 45.72 chg: +0.67 stop: 43.45 *new*

Railroad stock CSX continued to bounce on Friday but shares pared their gains after hitting $47.35 intraday. The stock is up more than 10% from our entry point and we strongly suggest that readers consider taking some profits right here. Tonight we're adjusting our stop loss to $43.45. Our target remains $49.90.

As we look ahead to this week we're going to set up a secondary entry point (position). We want to buy calls on a dip into the $44.25-43.75 zone with a stop loss at $43.45. If triggered our target is $49.90.

FYI: CSX is due to present at a Goldman Sachs Industrials conference on November 5th.

Suggested Options:
Our new entry point is the $44.25-43.75 zone. We're suggesting the November calls.

BUY CALL NOV 45.00 CSX-KI open interest=3583 current ask $3.70
BUY CALL NOV 50.00 CSX-KJ open interest=4961 current ask $1.40

Annotated chart:
CSX

Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 5.31 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million

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Energy SPDR - XLE - close: 51.40 chg: +1.05 stop: 44.75

After our research this weekend we're expecting a dip this week as investors take profits on a 10% bounce in the markets. The way to play that would be to buy a dip in the XLE in the $48.00-47.00 zone. More conservative traders might want to tighten their stops toward the $47 region. We're going to give XLE extra room and leave the stop at $44.75. Our target is the $56.50 mark.

Suggested Options:
We are suggesting the November calls.

Annotated chart:
XLE

Picked on October 30 at $ 50.35
Change since picked: + 1.05
Earnings Date 00/00/00
Average Daily Volume = 47.7 million

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______________ PUT Play Updates ______________

Volatility Index - VIX - cls: 59.89 chg: - 3.01 stop: n/a

The VIX continues to retreat. This past week has done a lot to signal a top in the VIX but just like stocks the VIX rarely moves in a straight line for very long. Don't be surprised to see some spikes higher on the way down. The question now (and always has been) is how low will the VIX be by November's expiration of VIX options. We have two and a half weeks left.

We're still not suggesting readers buy VIX puts. Instead look for a spike toward 65 or 70 as an opportunity to sell November calls.

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.

Annotated chart:
VIX

Picked on September 16 at = 30.30 first position
Change since picked: +29.59
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +13.17
Picked again Octo. 08 at = 57.53 third position
Changed since picked: + 2.36
Earnings Date 00/00/00
Average Daily Volume = --- million

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___________ Strangle & Spread Play Updates ___________

CBOE Volatility Index - VIX - cls: 59.89 chg: - 3.01 stop: n/a

We have about two-and-a-half weeks left before November options expire. It's going to be an interesting two weeks as we watch the VIX contract. As we near VIX option expiration the lower strike calls will rise in value to more closely match where the VIX is actually trading. Any strikes out of the money will quickly fade toward zero.

While the play has not panned out exactly as planned anyone who sold calls with the VIX was near its highs should be looking good. The suggestion to sell the higher strike calls on Monday appears to have been a good move if you took it.

Readers could use another intraday spike to 65 or 70 as another opportunity to open positions but if you do I would use a pair of higher strikes than the ones we have listed below. How about selling the November 50s and buying the 65s or 70s on a spike?

We'll make that VIX spread #4. If the VIX "trades" over 66.00 we want to sell the November 50 calls and buy the November 70 calls as a hedge. You may want to buy the 65s instead.

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

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<-high
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
Update 10/30/08 open 24.06, high 27.32, closed 25.20bid
Update 10/31/08 open 25.20, high 25.20, closed 24.30bid

-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<-high
Update 10/28/08 open 11.00, high 13.30, closed 9.40ask
Update 10/29/08 open 9.23, high 10.70, closed 11.00ask
Update 10/30/08 open 8.69, high 10.90, closed 10.00ask
Update 10/31/08 open 10.30, high 10.30, closed 9.00ask

Picked on October 12 at $ 69.95
Change since picked: -10.06

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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 <-high
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
Update 10/30/08 open 18.50, high 22.00, closed 20.30bid
Update 10/31/08 open 21.10, high 21.10, closed 19.20bid

-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 <-high
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
Update 10/30/08 open 4.90, high 6.20, closed 5.80ask
Update 10/31/08 open 5.90, high 6.10, closed 4.90ask

chart:
VIX


Picked on October 12 at $ 69.65
Change since picked: - 9.76

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______________ CLOSED PLAYS ______________

Freeport McMoran - FCX - close: 29.06 change: -0.96 stop: 27.45

I really think that FCX has a lot of potential. Unfortunately there was no follow through on Thursday's move. We still want to play defensively here so we're suggesting an early exit in FCX. Take a small loss now before it gets worse since we are expecting a market dip this week. Readers may want to keep an alternative entry point in mind to buy calls on a breakout higher at $30.65 or $30.75. At the moment I am watching for a pull back near $26.00 or maybe $25.00 as the next bullish entry point to buy calls on FCX.

chart:
FCX

Picked on October 30 at $ 30.02 /early exit 29.06
Change since picked: - 0.96
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million

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Hansen Natural - HANS - close: 25.32 change: -0.13 stop: 23.45

On Thursday night we told readers to exit and take profits. It looked like HANS had hit an important level of short-term resistance. The stock confirmed that on Friday with a late-day sell-off and failed-rally pattern. We're closing the play early instead of holding on for a rally to the $28.00 level. Move HANS to your watch list and see if shares find support again in the $23-24 zone.

chart:
HANS

Picked on October 23 at $ 21.47 /gap down entry/1st Exit 25.45
Change since picked: + 3.85 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million

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MasterCard - MA - close: 147.82 chg: + 7.76 stop: 129.90

Shares of MA look like they are picking up speed on their rebound. The stock added 5.5% on Friday albeit on lackluster volume. At this point I would expect a dip back toward $140 and then a continuation of the bounce. Unfortunately, we're out of time. MA is due to report earnings on Monday after the closing bell. We do not want to hold over the report so we're exiting early. The play turned out all right, especially if you waited and bought the dip in the low $120s.

chart:
MA

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: +16.82 /early exit 147.82
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million

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