Volatility Index - VIX - cls: 63.68 chg: + 9.12 stop: n/a
My, my how quickly the volatility returns to the market. We were expecting a corrective bounce higher but today's move seems a bit too much. I am tempted to sell at-the-money or out-of-the-money November calls here but you might want to wait to see if there is a continuation spike toward the 70 level first, which would be a better entry point to sell calls. If you do choose to sell calls you'll want to keep a mental stop loss in place where you'll buy them back should the VIX keep climbing. You don't want to be short calls if the VIX spikes back to 90 again.
We have about two weeks left before November VIX options expire.
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:
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.
CBOE Volatility Index - VIX - cls: 63.68 chg: + 9.12 stop: n/a
This two-day spike in the VIX is bad timing for our spreads. The delta on our deep in-the-money calls is rising quickly as time runs out on option expiration. I do think it's a temporary spike and the VIX will roll over again but nothing is guaranteed and it doesn't have to happen in the next two weeks. The spike to 90 last month was proof that the VIX can continue to break records and do the unimaginable if the market conditions warrant it.
We are not suggesting new positions at this time. If you don't have a protective (long) call in place then you may want to buy one now (not necessarily those listed below, maybe something around the 65 strike). If instead you think buying the higher-strike call as a hedge at this point is just good money after bad then you may want to consider just closing this play for a loss. Otherwise without a hedge we're really gambling, roulette-wheel style, on where the VIX falls come expiration day.
Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link:
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:
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:
Apple Inc. - AAPL - close: 99.10 change: -4.20 stop: 99.45
The worst two-day decline in the market since the 1987 crash was too much for AAPL. The stock spiked down to $98.00 and hit our stop loss at $99.45 closing the play. If the volatility index hadn't spiked so much it might be tempting to try a strangle or a straddle on AAPL at the $100 mark but the options are too expensive.
Baker Hughes - BHI - close: 33.40 change: -1.12 stop: 32.30
BHI was also caught up in the market's widespread sell-off and shares hit our stop loss at $32.30 ending the play. A new bounce over $35.00 might be a bullish entry point and shares were on the rebound this afternoon.
CSX Corp. - CSX - close: 42.66 chg: -1.85 stop: 43.45
Railroad stock CSX plowed through support near $44.00 and its simple 10-dma and quickly hit our stop loss at $43.45. The move today closed both positions in CSX.
Lockheed Martin - LMT - close: 76.82 change: -7.57 stop: 78.79
Shares of LMT gave up any resemblance of relative strength today. The stock cratered with an 8.9% sell-off that crashed through support near $82, $80 and its 10-dma. Our plan was to buy calls on a dip at $82.75 with a stop loss at $78.79. Shares of LMT hit our trigger and our stop loss in the same decline with barely a pause to catch its breath.
United States Oil (ETF) - USO - close: 50.15 change: -3.69 stop: 51.95
In the last three days the USO has gone from a brand new P&F chart buy signal to a sell signal. This ETF has moved more than 16% with a $58.78 high to today's $49.31 low. There appears to be no bottom for oil. OPEC nations are doing everything they can to show the world they are obeying their production cuts. Yet oil keeps sliding. The media will tell you it's fears of a global economic sell-off but that's been the story for the last $30.00.
The USO hit our stop loss at $51.95 closing the play.
Energy SPDR - XLE - close: 47.60 chg: -3.05 stop: 47.75
The XLE energy ETF gave up 6% as oil continued to implode. This ETF hit our stop loss at $47.75.