Option Investor
Play Updates

Worst Two Days since 1987

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Play Editor's Note: It's tough to be bullish when the market serves up the worst two day decline since the crash of 1987. We were expecting a pull back but this correction was steeper than expected and hit a lot of stop losses. We're going to wait and see how the market reacts to the jobs report tomorrow before adding new candidates to the newsletter.


CALL Play Updates

*none*


PUT Play Updates

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:
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:       +33.38
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      +16.96
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      + 6.15
Earnings Date            00/00/00
Average Daily Volume =        --- million  


Strangle & Spread Play Updates

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.

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
Update 11/03/08 open 24.50, high 24.50, closed 21.50bid
Update 11/04/08 open 19.00, high 19.00, closed 16.80bid
Update 11/05/08 open 17.56, high 20.60, closed 20.20bid
Update 11/06/08 open 26.90, high 28.00, closed 27.50bid

-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/suggested sell
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
Update 11/03/08 open  8.34, high 8.34, closed 7.00ask
Update 11/04/08 open  3.50, high 3.70, closed 4.00ask
Update 11/05/08 open  4.20, high 5.90, closed 5.60ask
Update 11/06/08 open  6.00, high 12.00, closed 11.20ask

Picked on October 12 at $ 69.95
Change since picked:     - 6.27 
 

-

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
Update 11/03/08 open 19.31, high 19.31, closed 19.10bid
Update 11/04/08 open 14.80, high 14.80, closed 11.80bid
Update 11/05/08 open 13.05, high 14.40, closed 15.30bid
Update 11/06/08 open 17.60, high 23.90, closed 22.00bid
-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/suggested sell
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
Update 11/03/08 open 4.60, high 4.81, closed 3.50ask
Update 11/04/08 open 1.15, high 1.60, closed 1.75ask
Update 11/05/08 open 1.66, high 2.70, closed 2.45ask
Update 11/06/08 open 2.80, high 6.90, closed 6.30ask

Picked on October 12 at $ 69.65
Change since picked:     - 5.97 


CLOSED BULLISH PLAYS

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.

chart:
AAPL

Picked on November 05 at $106.00 *triggered /stopped 99.45
Change since picked:      - 6.90
Earnings Date           10/21/08 (confirmed)
Average Daily Volume =      48.3 million  


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.

Chart:
BHI

Picked on November 05 at $ 34.50 *triggered /stopped 32.30
Change since picked:      - 1.10
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       8.5 million  


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. Position #1
Picked on October 23 at $ 40.41 /gap down entry/stopped 43.45
Change since picked: + 2.25 /originally listed at $43.74

Position #2
Picked on November 03 at $ 44.25 /stopped @ 43.45
Change since picked: - 1.59

Chart:
CSX

Earnings Date          10/14/08 (confirmed)
Average Daily Volume =      6.5 million  


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.

Chart:
LMT

Picked on November 06 at $ 82.75 *triggered/Stopped same day
Change since picked:      - 5.93
Earnings Date           10/21/08 (confirmed)
Average Daily Volume =       3.8 million  


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.

Chart:
USO

Picked on November 05 at $ 55.65 *triggered /stopped 51.95
Change since picked:      - 5.50
Earnings Date           00/00/00
Average Daily Volume =      12.3 million  


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.

Chart:
XLE

Picked on October 30 at $ 50.35 /stopped out 47.75
Change since picked:     - 2.75
Earnings Date          00/00/00
Average Daily Volume =     47.7 million  


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